How does a trading company work? (Proprietary Trading Examples)

A trading firm is usually a large financial institution that is a direct participant in the stock and financial markets. Prop trading occurs when employees in the trading department at a financial institution enter into transactions to buy and sell investment assets using the firm's resources and accounts. These transactions are often speculative in nature and are executed using derivatives or other sophisticated investment instruments.

The participants in the transactions are not the firm as a whole, but rather the trading specialists, the proprietary traders. A prop trader enters into an agreement with a company as an independent trader, not as an employee or client. The main activity of such a specialist is aimed at carrying out speculative deals during the trading day. The transactions involve the company's monetary resources and the movement of funds is carried out through a corporate account.

To occupy the position of a prop trader, you must first deposit an amount of money, commonly referred to as a risk deposit. The risk contribution determines how much leverage the company gives you. The funds deposited are used to compensate you for possible losses caused by the employee's activities.

For Example:

The risk contribution serves as a guarantee that the trader is looking after the interests of the company, and does not use an unreasonably high level of risk in his strategies. It is the company that is a party to every stock transaction, and therefore it is the company that bears the possible losses in any transaction.

You deposit a certain amount, such as $5,000, as a risk deposit into a financial institution's account. The company gives you access to trade with significantly higher leverage than the PDT protocol. The more money you deposit as a security deposit, the greater the available leverage.

Keep in mind that with this format, the trader must compensate 100% of all losses incurred during the trade. When you make trades, such as buying profitable stocks through company accounts and then selling them at a higher price, the commission is low, and you receive a significant share of the profit (about 85-90%).

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