April 13, 2024

Business Bib

Business & Finance Blog

The major differences between a funded trading account and a brokerage account

3 min read

Most traders are probably used to the usual brokerage trading account. Welcome to the word of a funded trading account, the proprietary trading plan. If you got wind of prop trading, learn how it compares to the normal brokerage account.

Definition

In our case, starting out with the definitions of these two is the best thing so that you understand what the two are all about.

A brokerage account involves the trader selecting a forex broker to open a trader\s account. The trader will then make a deposit to use the trading platform that is provided after opening the account. The trader is responsible for all profits and losses.

Proprietary accounts are much different. The trader gets in contact with a prop trading firm, chooses a plan that is paid for and accorded with a fully funded trading account. The profits made are shared between the two while the losses are only recouped by the firm.

Fees and deductions

Both the brokerage and proprietary trading firms have their own way of making profits. This is mainly done through fees and deductions. But how do the two compare?

Brokerage forex trading firms are known to deduct a flat rate commission per trade. There also exists complimentary deductions such as inactivity fees.

Prop trading companies have higher fees and deductions since the trader uses a funded account. However, a good company offers reasonable deduction amounts. These deductions include software fees, some companies do not have this. The trader agrees on the percentage of the profits that the firm will deduct.

Buying power

The margin accounts provided by forex providers have limitations on the buying power. This is mainly due to the various securities’ regulations and requirements. A good example is reg T that only allows for the leveraging on 50% of any of the securities. The buying power increases only when the trader makes more profit from a sell or deposits more capital.

Prop trading accounts offer buying power and leveraging on a totally different way. The trader is given a whopping trading fund that is relative to the preferred plan. The level of leverage taken is also controlled by the funded trader program‘s risk management policies. The firm also tops up the account even after cashing in to ensure higher buying power with more profit generated.

Licensing

Obtaining an operational license ensures the legitimacy of the trading. In nearly all countries, every trading company, whether brokerage of proprietary, need to be licensed. This ensures that the trading is safe and also secures any investment by traders.

What about the traders? This is where the differences set in between having a prop trading account or a brokerage one. Prop funded trading account holders may need licensing in some parts of the world. Traders with brokerage trading accounts need no paperwork or license.

Verdict

If you are thinking of who is better between the two account holders, a funded trader has the upper hand. With robust buying power and superlative access to other resources and tools, the chances of profitability are optimized. The risk factor between the two is also worth considering. Prop accounts offer zero risks on the traders own money while brokerage accounts have the risk at 100%.