What is proprietary trading: Main advantages

To become a successful trader and make steady profits from trading currencies, you need to be well-versed in terminology. One such term is the concept of prop trading or private trading. We have prepared detailed material in which you will be able to learn about the method of prop-trading, understand the pros and cons of this method and have your questions answered.

What is proprietary trading?

The concept of proprietary trading or prop trading means that a financial institution (a commercial bank, brokerage firm, or investment fund) directly trades or invests in stock market activities. These institutions may trade a variety of investment assets - stocks, bonds, derivatives, foreign currencies, commodity contracts, real estate, and others. These institutions invest their own money into investment instruments, not their clients' funds. This approach not only allows them to earn a commission for managing their clients' funds but also to earn a full profit from participating in trades.

Pros of prop-trading

The prop-trading methodology has gained quite a bit of popularity. It has several key advantages:

1. Increased profits.

Working by the prop-trading method allows institutions to significantly increase their profits compared to brokerage activities in which they receive only commissions for managing the resources of their depositors.

2. Inventory of securities holdings.

The use of proprietary trading allows a company to grow and diversify its securities portfolio. These assets can be sold to clients in case the liquidity of trading instruments decreases or restrictions are imposed on operations with securities on the open market.

3. Opportunity to get a discount on securities from trading institutions.

Increased demand for securities from financial institutions increases liquidity in the securities market. It is not uncommon for issuing companies to compensate proprietary trading organizations in the form of a discount on their stock or other securities. Most proprietary trading organizations offer discounts on securities that are not available to retail customers.

4. Private trading firms provide good support.

The specifics of the business of proprietary trading companies are highly organized with only a few people involved in the transactions. This simplifies the process of technical support of clients - the user can promptly solve any questions by phone or other communication methods. This gives a tangible advantage over cooperation with retail brokers with a huge clientele, where requests for support can take several hours to be processed.

5. Proprietary trading allows you to work with leverage.

Trading with leverage allows the opening of several parallel orders and increases profit in the transaction at a rather small deposit. But when using margin trading it is necessary to follow the rules of risk management and not to use all of the capital in one transaction.

6. Prop trading is good for providing liquidity through open orders.

If you use trading strategies with a large number of instruments, proprietary trading can be a more attractive option than working with a broker. Some proprietary trading firms allow you to hold more than a thousand open positions in one terminal at a time.

7. Proprietary trading firms allow you to diversify your portfolio and reduce risk.

All trading involves risk. Applying prop-trading methods with the use of leverage, you can start trading with a small deposit. You can then replenish your account and invest in other assets to reduce risk or invest some of your capital in stocks or mutual funds to diversify your investment portfolio.

8. Proprietary trading companies offer several trading platforms.

One of the huge advantages of proprietary trading firms is that they allow you to choose between multiple platforms. This expands your trading options by using the software with the best set of features for your requirements.

9. Prop trading offers a wide range of assets for short trading.

To sell effectively without coverage, you first need to find liquid stocks. Companies using proprietary trading methodology make it much easier for their clients to find securities for short selling. Regular users often encounter restrictions on buying or selling securities without coverage. Cooperating with proprietary trading companies allows you to solve this problem and find stocks with high liquidity.

In the following article, we will look at the disadvantages of proprietary trading and some other points on this topic.

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