Many retail traders are unfamiliar with prop or proprietary trading. Proprietary trading is when commercial banks or other financial institutions invest their assets directly. It is an additional way for financial institutions to make money, mainly because most of their income comes from commissions earned by trading on behalf of clients. Prop trading can be essential for financial institutions to prove their worth to clients.
Introduction to Proprietary Trading
Proprietary trading, commonly known as prop trading, is where investors carry out trade activities using funds and capital from a financial institution (prop firm). This investment method is standard with businesses like banks, hedge funds, and high-frequency trading firms. The percentage these institutions take can vary, but it mostly ranges between 10–50% of trade profits. Regardless of the sharing ratio being used, the volume of these transactions often means that brokers like OANDA Prop Trader make sizable sums.
Prop trading can be an excellent way to have some autonomy, even while using client’s funds. These institutions typically allow investors to make decisions, but there is a drawdown attached. That is, when traders’ losses reach a certain level, all activities might be suspended to avoid further risk.
Individuals, companies, and trusts also want to see their financial representatives invest in the same instruments they advise their clients to invest in. So you must know how to play by the rules and secure your position as a prop trader.
IPO Prop Trading
Proprietary trading used to be reserved for only large institutions, but that’s no longer the case. You can make incredible moves and record returns when you trade with the mindset of an institutional investor. Initial public offerings (IPOs) are excellent ways to invest like an institution. Here are some things to consider before investing in IPOs.
- Gain Insights Into the Industry
Every industry looks promising as an outsider, but flashy numbers might mask the reality. Learn more about an industry’s possible growth by reviewing historical data, learning about new inventions and innovations in the space, and potential policy changes. You do not want to invest in an industry that will cease to exist in a few years.
- Research the Company
If you’re comfortable with your industry analysis, the next step is learning as much as possible about the company you’re considering. For many startups, their IPO process is the first time the general public can learn more about their numbers and operations. It might be best to follow your gut if something looks strange or too good to be true. Ensure you dig as deep as necessary in this step.
- Scrutinize the Founding Team
There’s no shortage of eccentric founders in the startup ecosystem, and if you easily get swayed by smooth talk and fancy numbers, you can end up overlooking severe issues. When companies get large enough for IPOs, there’s usually increased media and institutional attention on the founders and early employees. Look beneath the surface.
- Think Long-term
As an IPO investor, you can expect incredible movements in the first few quarters. It usually starts with the IPO at a relatively low price, then astonishing growth as the market invests in it, and then a correction that results in the share price balancing and reaching an equilibrium. If you’re easily influenced by price movements, investing in IPOs might not be ideal.
- Analyze
Most people believe that data doesn’t lie, and that’s true to an extent. However, data professionals can misrepresent what the numbers say without technically telling a lie. A prominent startup with millions invested in it might grow from 10–20 users in a month, representing 100% growth. The growth figure isn’t a lie, but it’s misleading.
- Separate Facts from Fiction
What are your investment goals? Do you believe in the company’s long-term plans and prospects? Are you ready to wait out the storm? These are three essential questions you must ask yourself during the planning phase. If you’re emotionally attached to a company or people in the company, it might be hard to discern the data available to you logically.
- Do the Maths
Prop traders in 2024 are lucky because data, support, and insights are more accessible than ever before. Platform analysis is essential if you want unrestricted numbers breakdown, even if they seem irrelevant. You can access the best and most up-to-date numbers, use in-build charts to visualize data, and access breakdowns that make it easier to know what you’re looking for.
Growing as a Veteran Prop Trader
Not many retail investors think like prop traders, meaning you can enjoy a first-mover advantage. By the time the world realizes that prop trading is the way to go, you will have established yourself as a significant player in the ecosystem.
