What Is a Prop Firm? A Plain Explanation

“Prop firm” is short for proprietary trading firm. The original meaning is a company that trades its own money for its own profit, with staff traders on a salary and bonus. That still exists, but when most retail traders say “prop firm” today they mean something different: an online business that sells you a trading challenge and, if you pass, lets you trade an account it controls and pays you a share of the profit.

The two models share a name and very little else, so it helps to keep them apart.

The retail prop model in four steps

1. You buy a challenge. You pay a fee for an evaluation account of a stated size, such as $10,000 or $100,000.
2. You trade to a set of rules. Hit a profit target without breaking a daily loss limit or a maximum loss limit, often over a minimum number of trading days.
3. You get a funded account. Pass, and the firm gives you an account to trade under similar rules, with no further target to reach.
4. You are paid a share of the profit. Usually 80 to 90 per cent of what you make, paid on a schedule, after which the account carries on.

FTMO, which has operated since 2015 and is the firm most others are measured against, is a good reference point. Its 2-Step Challenge asks for a 10 per cent profit target, then a 5 per cent target in a second phase, with a 5 per cent daily loss limit, a 10 per cent maximum loss and at least four trading days. Its rules are covered in detail in our FTMO review.

0:16 / 2:34

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How a challenge works

From our lesson "Prop Firm Challenges Explained" (Forex basics, part 9). This part starts at 0:16 of the 2:34 video and plays in a large player.

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Whose money are you trading?

This is the question that matters most, and the honest answer is: usually nobody’s. Most retail prop firms run evaluation and funded accounts on demo, or simulated, accounts. FTMO says so plainly: the accounts it provides are demo accounts with fictitious funds, and the reward it pays is a share of simulated profit.

That does not make the payouts fake. Established firms do pay real money to traders who meet their rules. It does mean the firm decides what it will pay, under its own terms, and you have no claim on a pool of capital the way an employed trader at a bank does. Our guide to whether a funded account is real money goes into the detail.

How the firm makes money

Fees from challenges are the main income for most retail firms, because most people who buy a challenge do not pass it. Topstep, one of the few firms to publish figures, reports that only 16.8 per cent of its evaluations were passed in 2025, and that 33.3 per cent of traders who reached a funded account received a payout. Fee income from the many pays the profit share of the few.

Some firms also copy the trades of their strongest funded traders onto real accounts and earn from that. Either way, the firm’s business only works if it collects more in fees and trading income than it pays out. How prop firms make money explains why that matters to you.

Prop firm vs a regular broker account

The appeal is leverage on your skill without risking a large deposit. The cost is a set of rules that are stricter than any broker’s, and a counterparty with much less oversight. We compare the two routes in is prop trading worth it.

Who prop trading suits

• Traders with a tested method and a record of keeping losses small, who lack the capital to make that method pay.
• Traders who are comfortable with hard limits, because one bad day can end an account.
• Not beginners. A challenge is a test of discipline under rules, not a way to learn trading. A demo account is free and teaches the same market.

Key terms

Related guides

Start with these guides to understand the model in more depth.

• How prop firms make money: challenge fees, resets and why most firms are fee businesses first.
• What a challenge involves: targets, phases and loss limits in a typical evaluation.
• Is a funded account real money?: simulated accounts, live stages and where payouts come from.
• How to choose a firm: the checklist in order, starting with whether it pays.

Common myths about prop firms

• “The firm gives you its money.” At most retail firms the account is simulated; FTMO describes its accounts as demo accounts with fictitious funds.
• “Passing means you will be paid.” Topstep reports that 33.3 per cent of its funded participants received a payout in 2025.
• “It is a job.” You are a customer of the firm under its terms, not an employee.
• “It is risk-free.” Your trading losses are simulated, but fees are real, and so is the risk of a firm not paying.

Knowing these before you start avoids most of the disappointment new prop traders report.

Frequently asked

Related reading

• How do prop firms make money?
• What a prop firm challenge involves
• FTMO review