What is Prop Trading?
Proprietary trading also commonly known as prop trading is the act of a financial firm investing in the asset market to get direct gains. This is as opposed to the arrangement where financial firms trade on behalf of their clients to earn commissions.
Here, the financial firm opts to invest its funds so that instead of earning commissions, they pocket the whole deal.
Proprietary trading involves investing in a wide variety of assets such as currencies, stocks, bonds, mutual funds, and commodities among other assets.
This kind of investment is, however, on a large scale, as opposed to small-scale investments by retail traders.
In this post, I will show you how to make money prop trading in India. Keep reading to the end to grasp all concepts herein.
Establish a Financial Firm.
From our introduction, prop trading is the act of a financial firm investing in the asset market to get direct gains. What else does that mean to you if you wish to engage in prop trading?
You need to establish a financial firm registered under your name or create a partnership with others.
There are several ways you can establish your own financial firm.
The first way is becoming a hedge fund manager, where you manage client funds and trade for them to earn commissions.
Remember this is not prop trading yet, you are just sourcing funding for your prop trading to come later.
The second is establishing a commercial bank.
Do you have enough financial muscle to establish a commercial bank? Then go ahead and create one in your bid to establish your financial firm.
There are so many ways you can establish a financial firm in India, but let us stick to the above two first.
Build a wealth of experience.
You are still establishing a financial firm remember?
Also, try to amass the trading experience.
If you are managing hedging funds, the better. This experience is much needed.
Better still, if you are establishing a commercial bank, you are not only taking client deposits. You are investing them in the markets wisely by the use of sophisticated software and experienced personnel.
In your daily interaction with the markets, learn, unlearn, and relearn. Know what works and what doesn’t and still, improve on where you can see weaknesses.
Build yourself adequately in terms of experience in preparation for your prop trading which is to come later.
Do not myopically only think about what is at hand but what is to come.
While still at this, work on the next issue.
Establish your Financial Firm Financially.
Are you establishing a financial firm by managing a hedge fund?
Then that means you are trading for clients who in turn pay you commissions.
It is these commissions and other sources that constitute your firm’s finances.
If it is a commercial bank that you are establishing, then you are sourcing your finances from interest on loans. You also do some degree of trading as you gain experience.
Whatever you do, make sure you build your firm financially, because you don’t want to rely on client money forever.
In prop trading definition, we said that firms invest their own money to pocket the whole deal. They no longer solely rely on client commissions.
Once you have built a wealth of experience and gained enough financial ability to prop trade, you can then begin giving prop trading a thought.
Prepare to begin prop trading.
Preparation to begin prop trading means that as a firm, you now have enough money to invest on a large scale. You also have enough experience to trade the markets like no man’s business.
Once all that is in order, there are a number of things you need to do in preparation to begin:
- Prepare a portfolio of assets – you of course don’t intend to trade everything.
There are those assets you have closely monitored over the years you were gaining experience. You also want to diversify on assets as a risk management stratagem.
Considering all that, build a portfolio of assets.
- Assemble the necessary hardware and software – you may require more machinery like computers and furniture.
You may also require a sophisticated information system and trading software.
If that resonates with what you intend to do, ensure you do so in advance.
- Assemble the necessary personnel – you are now scaling up operations to make money for this firm.
You may require more experienced traders to trade for the firm. Get them if you need them.
- Strike a balance between handling client money and handling firm money – if you intend to do both prop trading and what you have been doing while establishing your financial firm, then draw clear lines on what needs to be done.
Separate prop trading from hedge fund management or commercial banking.
Begin Prop Trading.
Once you have everything in place, you can then hit the ground running in prop trading. Ensure to keep proper records because this is business.
Make huge profits.
The fact is, you are investing in the asset market on a large scale.
You had also built your firm’s financial muscle before you began.
You and your team have the highest degree of experience from trading for clients.
The huge profits which you have been making for your clients will now belong to you.
You are no longer taking peanuts as compensation from clients.
Even if you do, it’s on a completely different arrangement.
Do you want to eat life with a bigger spoon?
Then prop trading is the next big thing to do in India. If you actually have enough finances, you can establish a prop trading firm in India right away and make your huge profits.