One of the most rewarding activities you may engage in is trading on the financial market. In fact, millions of people all across the world do it today. We shall examine proprietary trading, including how it works, its benefits, and some examples.
The act of proprietary trading refers to a financial company, such as SurgeTrader, – you can read an honest surgetrader review here – or a commercial bank that invests for the purpose of direct market gain, as opposed to earning commission through trading for clients. This type of trading is also called ‘prop trading’ and happens whenever a financial company decides to make money from the activities of the market, rather than making small margins that are obtained through commission via client trading. This type of trading might include trading in the form of currencies, commodities, bonds, stocks, and a variety of other instruments.
Those commercial banks and financial companies that partake in proprietary trading do so because they believe that it gives them a competitive advantage. This advantage allows them to make more money than what could be made from index trading or through any other type of investment.
How proprietary trading works
Prop trading as it is sometimes called happens when a financial company or commercial bank uses its balance sheet and capital to perform financial transactions that are self-promoting. Trades like this are typically speculative in their nature and are executed via a number of derivatives and/or other types of investment vehicles that are equally complex.
The benefits of proprietary trading
Proprietary trading has numerous benefits for the financial company or commercial bank partaking in the activity. The most notable of these are higher profits – something that every company strives for. Whenever a company trades for clients, it makes its money from the various fees and commissions that it charges. However, the income made from this is only a tiny percentage in comparison to the overall amount that is invested and gained through trading and investments.
Another benefit to financial companies and commercial banks is that it allows them to stockpile a large inventory of different securities. This is helpful in two different ways. Firstly, having an inventory that is speculative is a great way for enabling the company to give its clients an unexpected advantage. Secondly, it lets the companies prepare themselves for illiquid or down markets during those times when it is much more difficult to both sell and/or purchase securities on the market.
The last benefit has to do with the second benefit mentioned. Prop trading lets a financial company or commercial bank establish themselves as important makers in the market through the provision of liquidity on specific groups of securities or individual securities.
Examples of proprietary trading
For proprietary trading to be effective and to keep the clients of the company in mind, the prop trading desk is ‘roped off’ from any other trading desks that are present. It is this desk that is responsible for the revenue of the financial company or commercial bank and is unrelated to working for clients.
That being said, prop trading desks do also function as makers for markets, as was detailed above. This happens when clients want to trade huge numbers of individual security.