What is a Prop Firm? Complete Beginner's Guide to Proprietary Trading

Updated: November 13, 2025 • 10 min read

You've heard traders mention "getting funded" or "passing their prop firm challenge," but what exactly is a prop firm? And more importantly, how can you use one to trade with $50,000 to $400,000 in capital without risking your own money?

This comprehensive beginner's guide explains everything about proprietary trading firms: what they are, how they work, how much they cost, whether they're legitimate, and most importantly—whether prop trading is right for you.

What is a Prop Firm? (Simple Definition)

A proprietary trading firm (prop firm) provides trading capital to skilled traders in exchange for a share of profits.

Instead of trading your own $5,000-$10,000 account, you pass an evaluation and receive access to $50,000-$400,000 in capital. You keep 80-90% of all profits generated, while the firm keeps 10-20%. If you lose money, the firm absorbs the loss—you only risked the evaluation fee ($49-$377 typically).

How Do Prop Firms Work? The Complete Process

The modern prop firm model follows a structured process designed to identify skilled traders and provide them with capital. Here's how it works step-by-step:

1Choose a Prop Firm and Account Size

Select a prop firm (FTMO, Apex, TopStep, etc.) and choose your desired account size:

  • Small Accounts: $25,000 - $50,000 (lower fees, good for beginners)
  • Medium Accounts: $100,000 - $150,000 (balanced risk/reward)
  • Large Accounts: $200,000 - $400,000 (highest profit potential)

Larger accounts cost more in evaluation fees but offer greater profit potential once funded.

2Pay Evaluation Fee

Pay the evaluation fee to access the challenge:

  • One-Time Fee Model: FTMO charges around $155+ (refunded after first withdrawal)
  • Monthly Subscription Model: TopStep charges $49-$149/month, Apex charges $147-$377/month
  • Reset Fees: If you fail, pay again ($49-$150 typically) to restart

3Pass the Evaluation Challenge

Trade a demo account following strict rules to prove your skill:

  • Profit Target: Achieve 8-10% account growth (Phase 1), 5% (Phase 2 if applicable)
  • Daily Drawdown Limit: Never lose more than 4-5% in a single day
  • Overall Drawdown Limit: Never exceed 8-10% total loss from starting balance
  • Minimum Trading Days: Trade at least 5-10 days to prove consistency
  • Time Limit: Some firms give 30 days per phase, others have no limit

Key Insight: You're trading simulated money during evaluation. The firm wants to see discipline, risk management, and consistent profitability—not lucky home-run trades.

4Receive Funded Account

Once you pass all evaluation phases, the firm provides a funded trading account:

  • Access to $50,000-$400,000 in trading capital
  • Same trading platforms you used during evaluation
  • Ongoing rules (similar to evaluation but slightly more lenient)
  • Ability to withdraw profits on schedule (weekly, bi-weekly, or monthly)

5Trade, Profit, and Withdraw

Trade the funded account and keep 80-90% of profits:

  • Profit Split: You keep 80-100% (varies by firm and account size)
  • Withdrawal Schedule: Weekly, bi-weekly, or monthly payouts
  • Scaling: Consistent profitability increases account size to $2M+
  • Multiple Accounts: Many traders run 2-5 funded accounts simultaneously

Example: Generate $5,000 profit on your $100K account. With 90% split, you keep $4,500. The firm keeps $500. Both parties profit from your trading skill.

Real vs Simulated Capital: The Truth

A critical question beginners ask: "Is the money real?"

The answer varies by firm and account type:

During Evaluation:

After Funding:

Does It Matter? Not really. Whether the capital is "real" or "simulated," you receive actual money for profitable trading. The firm's obligation to pay you is real, backed by their terms of service and business model. What matters is: Do they pay consistently? Check reviews and payout proof.

How Do Prop Firms Make Money?

Understanding the business model helps you trust legitimate firms and avoid scams:

Revenue Source #1: Profit Splits (Primary Income)

The most significant revenue comes from successful traders:

Revenue Source #2: Evaluation Fees (Secondary Income)

Revenue Source #3: Monthly Subscriptions (Some Firms)

Key Insight: Reputable firms profit most from successful traders, not failed attempts. A funded trader generating $5,000/month provides 12x more annual revenue ($6,000-$12,000) than a failed evaluation fee ($49-$377). The business model aligns firm success with trader success—which is why legitimate firms offer education, support, and reasonable rules.

Types of Prop Firms

Not all prop firms are the same. Understanding the types helps you choose the right one:

1. Futures Prop Firms

Specialization: CME futures (ES, NQ, crude oil, gold, etc.)

Examples: Apex Trader Funding, TopStep, Earn2Trade

Best For: Traders focused exclusively on futures markets

2. Forex Prop Firms

Specialization: Currency pairs, indices, commodities CFDs

Examples: FTMO, MyForexFunds, FundedNext, The 5%ers

Best For: Forex traders, swing traders, position traders

3. Crypto Prop Firms

Specialization: Bitcoin, Ethereum, altcoins

Examples: CTI (City Traders Imperium), Funding Pips

Best For: Cryptocurrency specialists

4. Instant Funding Firms

Specialization: No evaluation, immediate capital access

Examples: Blueberry Funded, FXIFY, InstantFunding.io

Best For: Experienced traders who want to skip evaluations

Prop Firm vs Personal Trading: Complete Comparison

Factor Prop Firm Trading Personal Account Trading
Capital $50,000-$400,000 (firm's money) $1,000-$50,000 (your money)
Risk Low (only risk evaluation fee) High (risk your entire account)
Profit Potential 10% on $100K = $10,000 (you keep $8,000-$9,000) 10% on $10K = $1,000 (you keep 100%)
Rules Strict (4-5% daily, 8-10% total drawdown) None (trade however you want)
Pressure Medium (firm capital, must follow rules) High (your life savings at risk)
Scaling Up to $2M+ with consistency Limited by personal wealth
Best For Skilled traders needing capital Learning, testing strategies

Are Prop Firms Legitimate or Scams?

This is the most important question for beginners. The answer: Many prop firms are legitimate businesses that pay traders consistently. However, scams exist.

Legitimate Prop Firms (Verified)

Red Flags (Avoid These Firms)

How to Verify Legitimacy

  1. Check Company Registration: Look up business registration in their country
  2. Read Independent Reviews: TrustPilot, Reddit r/Daytrading, Forex Peace Army
  3. Verify Payout Proof: Look for recent screenshots with visible dates
  4. Test Customer Support: Email them questions before paying—responsiveness matters
  5. Start Small: Begin with cheapest account size to test payout process
Critical Warning: If a prop firm makes passing too easy or promises guaranteed funding, be suspicious. Real firms have strict rules because they're genuinely providing capital—they must filter out unprofitable traders. Scams make passing easy because there's no real capital to lose.

Is Prop Trading Right for You?

Prop firms aren't for everyone. Here's who should consider them:

Prop Trading is Perfect If You:

Prop Trading is NOT Right If You:

Honest Reality Check: If you can't make 5-10% monthly profit on a personal $5,000 demo account with 1-2% risk per trade, you're not ready for prop firm evaluations. Master profitability first on demo, then use prop firms to scale. Don't view prop firms as magic solutions for unprofitable trading—they provide leverage for traders who already know how to profit consistently.

Master Profitable Trading First

Before attempting prop firm evaluations, develop a proven profitable strategy. Our trading system helps you build consistency with 94% success rate and proper risk management—perfect preparation for prop firm challenges.

Frequently Asked Questions

What is a prop firm in simple terms?
A prop firm (proprietary trading firm) provides capital to skilled traders who pass an evaluation. Instead of risking your own money, you trade the firm's capital and keep 80-90% of profits while the firm keeps 10-20%. You pay an evaluation fee ($49-$377 typically) to prove your trading ability by hitting profit targets (8-10%) within drawdown limits (4-5% daily, 8-10% total), then receive a funded account ($50,000-$400,000) once you pass. The firm profits from the percentage they keep of your trading profits, not primarily from traders failing evaluations. It's a performance-based capital access model benefiting both parties when traders succeed.
How do prop firms make money?
Prop firms make money through three primary sources: profit splits (keeping 10-20% of trader profits—their main revenue), evaluation fees ($49-$377 per attempt, often refunded after first withdrawal), and monthly subscription fees (some firms like TopStep and Apex). Contrary to popular belief, reputable firms profit most from successful traders—a trader generating $10,000/month provides $1,000-$2,000 recurring revenue through profit splits, far exceeding one-time evaluation fees. This business model incentivizes firms to help traders succeed, offer reasonable rules, provide education, and scale accounts. Failed evaluation fees are secondary income, not the primary business model for legitimate firms.
Are prop firms legit or a scam?
Many prop firms are legitimate businesses that consistently pay traders. Reputable firms include: FTMO (9+ years, 4.8 stars from 16,306 reviews), Apex Trader Funding (established futures specialist), TopStep (CME specialist, 4.6 stars from 6,663 reviews), and FundedNext (51,000+ funded traders, $147 million distributed). However, scams exist. Red flags include: no company registration, refusing payout proof, hidden terms, requiring personal account access, excessive fees with no capital, fake testimonials, and brand new firms with no track record. Always verify: company registration, independent reviews on TrustPilot/Reddit, recent payout proof with dates, and responsive customer support before paying. Start with smallest account size to test their payout process.

Conclusion

Prop firms offer a revolutionary path for skilled traders to access substantial capital ($50,000-$400,000) without risking personal savings. By passing an evaluation that proves your profitability and risk management, you gain access to life-changing capital leverage while keeping 80-90% of all profits generated.

The model benefits both parties: firms profit from successful traders' ongoing performance, while traders access capital they couldn't otherwise afford. This alignment of interests explains why legitimate firms offer reasonable rules, education resources, and growth opportunities.

However, prop firms aren't magic solutions. They provide capital leverage for traders who already possess profitable strategies and disciplined execution. If you can't consistently profit on a $5,000 demo account, focus on skill development before attempting evaluations.

For skilled traders ready to scale, prop firms represent one of the best opportunities in modern trading—transforming a $5,000 profit ceiling into a $50,000+ monthly income potential through leveraged capital access.

Ready to Get Funded?

Master the strategies needed to pass prop firm evaluations. Our proven system teaches consistent profitability with proper risk management—exactly what prop firms look for in funded traders.