Are Prop Firms A Good Investment
Prop firms are growing rapidly in popularity over the last few years and larger investors and traders are starting to take note. Larger traders are now starting to lean on prop firms as an important part of their trading portfolio.
That begs the question, are prop firms a good investment for traders?
Prop firms are a great investment for profitable traders and investors, providing they are able to generate small consistent returns within the markets.
In this article we will be assessing prop firms as an investment opportunity to weigh up the pros, cons and due diligence needed before adding prop firms to your larger portfolio/trading approach. Let’s get into it…
Using Prop Firms As An Investment
Prop firms, if used correctly, can make a great part of your overall trading or investment portfolio. When used incorrectly, they’re no different to just gambling your money in the casino.
Profitable traders have been quick to realize the utility of prop firms in long term investing. You’re, in theory, able to invest just a few hundred pounds into a trading challenge to have hundreds of thousands of dollars in liquidity to use.
Every month you can withdraw your profit split and move it to a safe, traditional investment such as bonds or high interest savings accounts so you’re less exposed to the forex markets.
As you can see, if you’re profitable – there is a huge amount of utility here which should not be ignored!
The Benefits Of Using Prop Firms As A Part Of Your Investment Approach
Prop firms can be a great part of a wider investment or trading portfolio and should certainly be considered – providing you’re working with the right prop firm!
Here are some of the benefits of including prop firms in your investment approach…
1. ROI Is Brilliant
If you’re a profitable trader, the ROI of prop firm funded accounts is brilliant. Let’s say you’re generating average returns of 1.5% per month in the markets.
You take a $200,000 challenge with Lux Trading Firm and pass the challenge. This costs £599.
Your first month of trading, you would return $3,000. You would take a 75% profit split, resulting in $2,000 in your pocket – plus the fee of the challenge is returned through stage one and stage two.
Meaning one month after being funded, you’re above breakeven on the prop firm investment and it’s purely profit from this point onwards!
Spending £599 to have access to $200,000 in trading capital is a no brainer if you’re profitable!
2. No Need To Compound Externally
Prop firm accounts do not require compounding, meaning you can take your bi-weekly or monthly withdrawals without being concerned that you’re slowing progress.
You are then free to tax your profits and invest elsewhere, generating further returns from a diverse range of sources.
3. Scaling Is Possible
Some prop firms offer capital scaling. For example, with Lux Trading Firm, for every 10% our Elite Funded Traders earn, we will double their capital up to $10,000,000. This means you can grow this part of your portfolio much faster than you can any other part!
4. Possible To Automate
It’s possible, through the use of trade copy software, to replicate the trades taken on your prop firm account onto your personal capital. Although this does increase your risk as your exposure to your forex trade increases, you can change your risk parameters per trade to reduce the risk if you see fit.
5. Low Risk
When you’re trading with a prop firm, you don’t have your own capital in the account. Therefore, the risk to you is nothing! Regardless of trading performance, the worst that can happen to you as the trader is to have your account disabled for violating the rules – there is no monetary risk there.
More importantly, this frees up your personal capital to be invested elsewhere.
The Cons Of Using Prop Firms As A Part Of Your Investment Approach
Using prop firms as a part of your investment portfolio isn’t always a good idea – in fact, there are a few negatives that you need to consider when making this decision…
1. Prop Firms Can Go Bust
It’s no secret that some prop firms have gone bust over the last few months. Notably, MyForexFunds got shut down by the regulators in Canada due to their alleged illegal business practices. This is a risk to traders that are thinking long term – you don’t want to be wasting months with a prop firm for it to be shut down the next month.
However, this chance can be greatly reduced by working with a prop firm that offers real trading capital like Lux Trading Firm. Real money prop firms get paid from profitable traders – meaning they do not need more traders to sign up to earn money, they’re entirely self sufficient!
Whereas demo prop firms need a constant churn of new unprofitable traders to pay the withdrawals of the profitable traders – meaning at one point, when the new supply dries up, these firms will crumble overnight!
2. Prop Firm Challenges Are Expensive
If you are not a consistently profitable trader, the chances are that you will be taking multiple prop firm challenges in order to become funded. This can end up costing traders a huge amount of money as prop firm challenges are not cheap, especially with real/reputable prop firms.
It’s worth noting that most prop firms do offer a partial refund on a challenge fee, if you pass and get funded.
3. Prop Firms Have Rules
Prop firms have rules in terms of drawdown and losses which limit the volume you can trade and risk within trades. This ultimately keeps both you and the firm much safer. However, it does mean your risk tolerance has to be fairly low whilst trading prop firm capital so that is something to bear in mind.
How To Select A Prop Firm To Work With
Selecting a prop firm to work with needs to be something you take seriously. Conducting due diligence is incredibly important as the prop firm industry is currently unregulated. Therefore, you need to ensure you’re working with a reputable prop firm that has your best interests at heart.
Here are some simple tips to consider when undertaking your due diligence:
Firstly, check the reputation of the prop firm in question. You should be able to see a huge amount of reviews on forums and third party sites like Trustpilot. This will give you a real idea of how traders are getting on with the prop firm and whether or not they have been trustworthy thus far.
The age of the prop firm is incredibly important too. If a prop firm is brand new, we have no idea as to their operating model or whether or not they can stand the test of time.
An older prop firm will have already navigated most of these issues that prop firms face and come out on top!
3. Funding Method
The way in which you’re provided with funding is also incredibly important. If you’re offered demo accounts or simulated funds, it’s likely that the prop firm is a pyramid scheme.
If a prop firm is providing you with real funds, such as Lux Trading Firm, it means the firm is not a pyramid scheme and it’s more likely that the prop firm will not crumble like some of firms have over the last few years.
In Summary – Are Prop Firms A Good Investment
In conclusion, prop firms are a great investment if you’re a profitable trader but you must ensure you’re working with a prop firm that has your best interest in mind.
If you’re unprofitable or working with a prop firm offering ‘simulated’ trading accounts, then prop firms are not going to be a great investment for you personally.