Let’s be honest, the biggest hurdle for most traders isn’t strategy; it’s capital. You can have a great system, but a small account holds you back. That’s the exact problem prop firms were created to solve. Think of a prop firm as a partner. It’s a company that fronts the trading capital, so you don’t have to risk your own savings.
But only 1 in 20 traders ever pass a prop firm challenge. That number alone shows how tough professional trading can be.
In this guide, H2T Funding will break down what is a prop firm is in trading, and what prop firms do. You’ll also explore three main types of prop firms, see what a trading day looks like, and learn how to choose a reputable company. By the end, you’ll know if prop trading is the right path for your goals.
Key takeaways
- A prop firm is a company that funds traders with its own capital and shares profits, giving them access to larger accounts without risking personal savings.
- These firms operate by testing traders through trading challenges, then offering funded accounts with strict risk rules and profit splits ranging from 50/50 up to 90/10.
- Many traders join because they lack capital but want professional tools, mentorship, and scaling opportunities, even though rules and fees add pressure.
- There are three main models: challenge-based firms like FTMO and Topstep, instant funding options such as FXIFY or Tradeify, and hybrids like FundedNext.
- Success rates remain low. QuantVPS (2025) reports that only 5–10% of traders pass challenges and about 7% receive payouts, highlighting the risks involved.
1. What is a prop firm in trading?
A prop firm, also a proprietary trading firm, is a company that lets traders use its own capital to trade instead of their personal money. The trader keeps part of the profit, and the firm takes the rest. This model gives skilled traders a chance to access bigger funds without needing a large starting balance.
In essence, a proprietary trading firm acts as both an investor and a partner. It selects traders through an evaluation process, sets clear profit targets and drawdown limits, and offers access to advanced trading platforms.
Some firms also provide educational support and mentorship to help traders refine their trading strategies and manage risks effectively. It also raises the question of what a prop firm trading account is and how it differs from using personal capital.
To many people, proprietary trading creates an opportunity to trade larger positions without needing a huge starting balance. They can focus on building strategies, market analysis, and managing risk while the firm provides funding. This partnership opens the door to trading opportunities that would otherwise be out of reach.
For beginners, another common search is what a prop firm account is in trading, which highlights the appeal of trading with larger capital allocations.
2. How do prop firms work
Prop firms work by providing traders with access to funded accounts, rather than requiring them to use their own personal money. These accounts can start from $10,000 and scale up to several hundred thousand dollars, depending on the trader’s financial performance and the firm’s rules.
The path to getting funded typically starts with an evaluation process. Here, you’ll need to prove you can consistently meet profit targets while respecting the firm’s drawdown limits. Most firms use a challenge system to check consistency, discipline, and risk control before granting larger accounts. This evaluation also functions as a trader selection filter that favors disciplined behavior.
If you pass the evaluation, you’re granted access to a funded account to trade in the live markets. In practice, this funded account is referred to as a prop firm trading account, with clear rules on profit targets and drawdown limits.
Profits are shared, often between 50/50 and 80/20, with the larger share going to the trader. Firms also provide reliable trading platforms and data, so execution stays consistent.
Rules center on drawdown limits and profit targets to protect firm capital. If rules are broken, the account is closed. This way, firms protect their capital allocation while rewarding traders who can perform well. The firm will also clarify capital allocation and how profits are split before traders start.
Many modern firms also earn from evaluation fees, not just trader performance metrics. With more funded traders active across assets, firms benefit from market liquidity while traders avoid risking personal balances.
3. Why do traders join a prop firm?
Many traders join prop firms because they face one big challenge: a lack of capital. Even skilled traders often cannot scale strategies with small personal accounts. Prop firms solve this by offering large funded accounts, structured profit sharing, and professional resources. However, joining comes with both advantages and disadvantages.
Pros of trading with a prop firm
- Access to larger capital: Traders can manage accounts from tens of thousands to millions, allowing bigger positions and better diversification.
- Trade with less fear: The firm’s capital is on the line, not your personal savings. The only money you risk is the one-time evaluation fee, which lets you focus more on your strategy and less on the fear of losing your own cash.
- Professional trading tools: Prop firms provide advanced trading platforms, real-time data, and strong execution speed.
- Education and mentorship: Many firms include training, webinars, and feedback to sharpen trading strategies.
- High profit potential: Profit splits often range from 70/30 to 90/10, giving traders the majority of returns.
- Trading instruments: Traders can access forex, stocks, futures contracts, commodities, and crypto through one account.
Cons of trading with a prop firm
- Strict rules: Traders must respect drawdown limits, consistency requirements, and daily loss caps.
- Evaluation fees: Most firms charge non-refundable costs for challenges or assessment programs.
- Simulated trading phase: Evaluations often use demo accounts, which lack the full pressure of live markets.
- Shared profits: Unlike trading personal funds, traders keep only a portion of gains.
- Competitive environment: Some firms foster pressure with leaderboards and strict performance demands.
For many traders, the benefits outweigh the drawbacks, especially if they have skill but limited funds. They can focus on building trading strategies and risk management while the firm provides funding and tools.
4. Common types of prop firms
Prop firms use different models to allocate capital, and each model fits different types of traders. The three most common are challenge-based, instant funding, and hybrid models.
| Type | How it works | Best for |
|---|---|---|
| Challenge-based | Traders must pass an evaluation by hitting profit targets while respecting drawdown and risk rules before accessing a funded account. | Disciplined traders who are confident in their consistency and want lower upfront costs. |
| Instant funding | Traders gain immediate access to a funded account after paying a fee, without completing a challenge. | Traders who want fast capital access and prefer trading right away, even with stricter rules. |
| Hybrid | Combines instant funding with an evaluation stage for higher capital accounts. | Traders who want flexibility, quick access at the start, but larger scaling options after proving their skills. |
4.1. Challenge-based prop firms
This is the most widely used model. Traders must complete an evaluation phase where they aim for profit targets while respecting drawdown and daily loss rules. Passing unlocks a funded account with real profit-sharing.
A well-known example is FTMO, which runs a two-step process called Challenge and Verification. Successful traders can scale up and keep as much as 90% of profits. Topstep uses a similar approach in futures, where traders must complete the Combine before trading live capital.
Challenge-based firms are best for disciplined traders who want lower entry costs and are confident in their ability to meet rules. The main drawback is that failing the challenge means losing the evaluation fee. These programs rarely support high-frequency trading because strict rules limit scalping and ultra-fast execution.
4.2. Instant funding prop firms
Instant funding firms give traders access to a funded account immediately after paying a fee. There is no evaluation stage, but rules are usually stricter, and profit splits may be less generous.
Examples include FXIFY, Tradeify, and Goat Funded Trader, all of which provide instant accounts with profit splits up to 90%. Traders can begin live trading on day one but must operate under tighter drawdown limits and risk controls.
This model is best for experienced traders who want fast access to capital and prefer to skip lengthy challenges. The trade-off is higher cost and stricter conditions.
4.3. Hybrid prop firms
Hybrid firms combine both models. Traders may start with a small instant account to trade right away, then scale up by completing an evaluation for larger capital.
FundedNext is a clear example, offering both instant funding and challenge programs. This gives traders flexibility: trade small amounts immediately or grow into higher funding after proving consistency.
Hybrid models are ideal for flexible traders who seek both quick access and long-term growth potential. The downside is that conditions can be more complex compared to pure models. Some hybrid setups permit algorithmic trading as long as bots respect risk limits and execution rules.
5. Illustration: A day as a trader for a prop firm
Trading for a prop firm looks different from managing your own small account. The journey starts with registration and passing the evaluation, then moves into live trading and profit sharing. Here’s how a typical day might unfold.
- Morning setup: The day begins by logging into the firm’s trading account, checking overnight news, and double-checking the rules on risk and drawdown. During active market hours, you’re placing trades based on your strategy, but every position must follow the firm’s strict sizing and stop-loss requirements.
- Performance tracking: Throughout the day, trades are monitored against profit targets and daily drawdown limits. Breaking a rule can mean losing the funded account, so discipline is key.
- End of day review: After closing positions, the trader updates their journal and checks metrics provided by the firm. Many firms require detailed feedback to ensure risk management is consistent.
- Profit sharing: If targets are met, the trader can request payouts, often weekly or monthly. For example, a trader with a $100,000 account might earn $4,000 in profit, keeping 80% ($3,200) while the firm takes the rest.
This routine shows how prop firm trading balances opportunity with accountability. Traders get the chance to scale their results, but only if they respect the structure that protects the firm’s capital.
6. Prop firms vs individual trading & brokers
While both brokers and prop firms connect traders to the financial markets, the way they operate is very different. A broker provides market access so you can trade your own funds, while a prop firm supplies capital under structured rules and profit sharing.
| Factor | Prop Firms | Individual Trading & Brokers |
|---|---|---|
| Capital | Large funded accounts (often $10k–$200k or more) without risking personal savings. | Limited to your own money; growth depends on account size. |
| Risk | Firm absorbs losses, but strict rules apply; breaking them ends the account. | You carry full risk; no limits unless self-imposed. |
| Profits | Shared through profit splits (commonly 70–90% to the trader). | You keep 100% of profits after costs. |
| Costs | Evaluation fees or instant funding charges. | Broker fees such as spreads, commissions, or swaps. |
| Flexibility | Trading styles may be restricted by firm rules. | Full freedom to design and execute strategies. |
| Support | Many firms offer mentorship, analytics, and structured risk management. | Brokers mainly provide platforms and market access. |
Prop firms lower the financial barrier but reduce trading autonomy, while brokers give freedom but require personal capital and risk tolerance. The decision depends on whether you prioritize scaling with outside funds or complete independence.
7. How to choose a reputable prop firm
Not every prop firm is trustworthy. Some operate with fair rules and real payouts, while others rely mainly on collecting fees from failed challenges. Choosing the right firm is critical to protect your money and time. Here are the key factors to consider:
- Transparency: Look for firms that clearly state their profit splits, drawdown rules, and evaluation steps.
- Reputation: Check the trading community, reviews, and payout proofs to confirm the firm’s track record.
- Profit sharing: A fair split usually ranges from 70% to 90% in favor of the trader. Beware of offers that sound too good to be true.
- Costs and fees: Evaluate the price of challenges or instant accounts. but also review hidden fees such as data subscriptions, platform access, or evaluation retakes. Some firms charge additional withdrawal or inactivity fees that aren’t immediately visible on their website.
- Withdrawal conditions: Many firms require a minimum profit (for example, $200–$500) before allowing withdrawals. Payouts are usually processed every 14–30 days, but verification steps or internal reviews can delay transfers. Make sure you understand when and how you can request payouts before trading live capital.
- Scaling and contract rules: Some firms promote “scaling programs,” but you’ll only qualify if you meet specific profit and consistency targets over several months. Others may reduce your capital (“scale down”) after losses or rule violations. Always read the fine print to know what triggers these changes.
- Support and resources: Reputable firms provide access to reliable trading platforms, market data, and sometimes mentorship.
- Regulatory awareness: While most prop firms are not brokers, they should still follow clear legal guidelines and maintain compliance standards. Verify the firm’s registered address, business license, and payout processors. Avoid companies that hide their legal entity or use unverifiable payment channels.
Warning: Some firms rely on strict rules designed to make most traders fail, generating revenue from repeated challenge fees. Always research before committing. To explore detailed comparisons and honest insights, you can check out the prop firm reviews at H2T Funding.
8. Challenges and risks of prop firms
The 2023 My Forex Funds shutdown reminded traders how fragile unregulated prop firms can be. Since then, many firms tightened their compliance and transparency policies, reshaping industry standards in 2024–2025.
Prop firms can be a powerful way to access capital, yet they are far from risk-free. Traders need to understand not only the benefits but also the hidden challenges that come with this model.
- Profit sharing: When trading with a prop firm, you never keep the entire profit. According to QuantVPS (2025), most firms offer profit splits between 70% and 90% to the trader, meaning 10–30% of profits are kept by the firm. While fair since the company provides the capital, this still reduces overall earnings compared to trading with personal funds.
- Performance pressure: Prop firms set strict profit targets and risk rules. The constant need to stay within daily loss and drawdown limits can create stress, leading to overtrading or poor decisions, particularly for those with less trading experience.
- Evaluation hurdles: Most firms require traders to pass challenges or assessments before gaining access to a funded account. According to a CFTC & FTMO data of a 2023 study of 10 U.S. prop firms and 3,000 traders, about 94% of participants fail these challenges, with only 6% meeting the requirements.
- Limited control: Unlike personal trading, you cannot trade with complete freedom. Many firms restrict position sizes, forbid strategies such as scalping or news trading, and set strict trading hours. These policies protect company capital but can frustrate skilled traders.
- Regulatory grey areas: Prop firms are not brokers and usually operate outside traditional financial regulation. This lack of oversight makes it harder to ensure fairness or accountability, especially with new or smaller firms.
- Unclear terms and conditions: Some firms use complex or vague rules about drawdowns, withdrawals, or payout timing. Misunderstanding these terms can lead to losing your account despite being profitable.
- Operational risks: Technology failures, platform outages, or execution delays can harm results. Firms may also change business models or rules suddenly, creating uncertainty for traders.
- Psychological impact: Strict rules and the constant risk of losing your account create mental strain. Stress, anxiety, and frustration are common, especially during evaluations with tight deadlines.
- The hidden business model: Many firms rely heavily on challenge fees. The rules may be designed to be extremely strict, which ensures most traders fail. In these cases, your fee becomes the firm’s main product, not your trading results.
- Regulatory risks: Unlike brokers, prop firms often operate in a legal grey area. The shutdown of My Forex Funds in 2023 sent a shockwave through the industry. It was a stark reminder that these firms can disappear overnight, leaving traders locked out of their accounts and without their payouts. This is the biggest risk of operating in an unregulated space.
- Country-specific bans: Some prop firms have restricted access for traders in specific countries. These sudden bans usually stem from concerns about cheating or group rule violations. For traders, this means you could lose access to your account overnight simply because of your location.
Trading with a prop firm provides opportunities to scale but also exposes traders to financial, operational, and psychological risks. With such low success rates, careful research, reading the fine print, and building emotional resilience are essential before joining.
9. Comparison of top prop firms in 2025
Choosing the right prop firm depends on your trading style, risk tolerance, and capital goal. To help you evaluate your options, here’s a quick look at how the most reputable prop firms compare across key metrics:
| Prop Firm | Account Size Range | Profit Target | Max Drawdown | Profit Split | Evaluation Fee | Special Features |
|---|---|---|---|---|---|---|
| FTMO | $10K – $200K | 5% – 20% | 10% | 80% – 90% | From €89 | Two-step evaluation; strong community & analytics |
| Topstep | $50K – $150K | 6% | 4% | 80 – 90% | From $49 | Futures-only firm; salary options for funded traders |
| The5ers | $5K – $250K | 5% – 10% | 10% | 50% – 100% | From $39 | Multiple account options & scaling to $4M |
| FundedNext | $2K – $200K | 4% – 10% | 6% – 10% | 80–90% | From $32.99 | Hybrid model: instant + challenge options |
| FXIFY | $5K – $400K | 5% – 10% | 4% – 10% | 90% | From $39 | Fast payouts, flexible scaling, crypto trading access |
Note: Figures are based on official firm disclosures as of 2025 and may vary by plan type.
These firms represent a mix of challenge-based, instant, and hybrid models, allowing traders to choose the structure that best fits their style and risk appetite. Always review the latest rules before joining, as firms frequently update their terms and payout systems.
10. FAQs
The purpose of a prop firm is to give skilled traders access to larger trading capital. Instead of risking their own money, traders use company funds under set rules, and both sides share the profits.
Yes, the reputable ones do; their business model depends on it. Verified payouts are proof of their legitimacy. While payouts are regular, the key is to choose a trustworthy firm with a long track record. Your due diligence here is non-negotiable.
It can be worth it if you have strong trading skills but limited funds. Prop firms allow you to scale strategies quickly, though you must accept rules, fees, and profit sharing. For traders seeking full freedom, personal trading may be a better fit.
There is no single “best” prop firm, as it depends on your style and goals. Firms like FTMO, Topstep, and FundedNext are often rated highly for transparency and payouts. Always research reviews and compare rules before choosing.
Earnings depend on your account size, profit split, and performance. For example, on a $100,000 funded account with an 80% split, a $5,000 profit month means you keep $4,000. There is no guarantee of income; results vary by trader.
A prop firm account is a funded or simulated trading account provided by the firm. It lets you trade with their capital under risk rules. If you generate profits and follow the rules, you receive a share.
A prop firm challenge is an evaluation test where you must hit profit targets and respect drawdown limits. Passing proves discipline and consistency, earning you access to a funded account.
No, most prop firms do not pay a fixed salary. Traders earn by generating profits and receiving their share. Some firms may offer bonuses or competitions, but income mainly comes from trading performance.
No, trading with a prop firm is not illegal. Prop firms are private businesses that allocate capital under contracts. However, they are not regulated like brokers, so choosing a transparent and established firm is important.
11. Conclusion
Understanding what is a prop firm is the first step for traders who want to scale their skills without risking large personal savings. Prop firms provide access to bigger capital, structured risk management, and the chance to earn through profit sharing. At the same time, they impose strict rules and fees that require discipline and consistency.
If you are a trader with talent but limited funds, a prop firm could be the path to grow faster. The key is to choose a reputable company, manage risk carefully, and treat trading as a professional activity rather than a shortcut to quick profits.
To explore more insights, reviews, and strategies, visit our dedicated section on Prop Firm & Trading Strategies at H2T Funding. You can also check out our in-depth prop firm reviews to compare rules, profit splits, and funding models across top firms before making your choice.
