When you first hear about prop firms, they sound almost too good to be true. You can trade with someone else’s money, keep the majority of the profits, and risk nothing of your own. It’s the dream of every aspiring trader with a small account.
But this dreamy opportunity and access to a large account begs the question: If they’re not taking your money, how are they making it? Understanding how these firms earn is key to knowing what you’re getting into and how it affects you as a trader. Here are five ways they generate revenue.
1. Evaluation/Challenge Fees
This is often a prop firm’s biggest revenue stream. Most online prop firms require traders to pay for a challenge. It’s a test of trading skills based on rules like profit targets and drawdown limits. Even if you choose a firm with an instant funding option, you still have to pay a one-time fee to get access to your trading account. Most of the profit for the firm comes from failed challenges, and prop firm challenges are notorious for being hard to pass. If you win, on the split side, firms like Maven Trading refund the amount to you.
2. Monthly Subscriptions
Some firms charge monthly fees for access to trading platforms, feeds, or maintenance. This recurring revenue model helps keep cash flowing, especially from traders who stick around. Instead of charging a single fee at the beginning, or the sign-up stage, these firms require an ongoing fee for using their services and trading accounts. It might sound like the less appealing option, but some traders prefer the level of funding and features that come with it and continue paying.
3. Profit Share from Funded Traders
If you do pass the evaluation and start trading with a funded account, the firm takes a percentage of your profits. The amount depends on the firm and your account size. While you get to keep the majority of the split, there might be additional conditions or requirements tied to the payout. But this method is the most obvious revenue stream of a prop firm.
4. Selling Add-Ons
Some prop firms offer paid trading education, mentorship programs, community access, or extra tools. While not always a mandatory add-on, these additions can become a secondary source of income for the firms. This approach works best on aspiring traders with relatively less experience and knowledge than professionals. A good firm should be transparent and focused on skill, not selling you hope.
5. Simulated Environment
Some people argue that since some of these firms don’t offer real market execution and are not risking real capital, they make higher profits. While it’s true that simulated trading helps cut down or even profit from traders’ losses, the profits earned from it are very real and shared with the traders as real money. A simulated account is not a scam, but a way to mitigate risk while offering the same pressure and experience of trading with real money. Even if the capital is not real, the profits are.
Conclusion
At first it sounds too good to be true when you hear that you can make an 80/20 profit split trading without having to use your own capital, but it’s actually real. These prop firms make their money off of challenge fees, profit sharing, selling add-ons, and monthly subscription fees. Knowing how they make fees you’ll be able to decide on the right prop firm for you.