Prop shop
| Prop shop |
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Prop shop (proprietary shop) is a company that uses its own capital for trade on financial markets in order to gain profits. Usually prop shops are created by individual investors who contribute their own money. They can trade themselves or employ specialists. Trading as company, not as individual gives access to greater extent of financial instruments. The risk of investment in such company is very high, however profits also can be substantial.[1]
As the prop shop is usually a small company it has limited possibility to analyze extensive data about the market. This limits the investment strategy to several products. Such a specialization can improve results on stable market, however, in case of crisis it can be to little differentiated.
Prop shop or hedge fund
Hedge funds[2] are larger, have better access to data, employ more specialists. Therefore, they can operate in greater scale. However hedge fund gives very limited access to information how company operates. In prop shop every investor knows how it works. Hedge funds can invest in many financial instruments. In addition, these types of investments are independent of the general economic situation prevailing in the market (due to the low correlation with stock exchange indices). One of the characteristic features of hedge funds is that they generate positive interest rates.
Hedge funds are very heterogeneous and use different investment strategies.[3] Not all of them also achieve rates of return higher than the S&P500 index. The most popular hedge fund index is Credit Suisse First Boston. The funds are investments designed for periods not shorter than 3 years. This is due to the fact that in the short term they are not able to achieve attractive results.
Benefits
The advantage of this configuration is that as an entrepreneur, you have the opportunity to use the company's purchasing power for your transactions. This avoids the minimum SEC requirement on the account of $ 25,000 for daily exchange and gives you access to 10: 1 leverage in stock trading and options.
For example, you can join a store with a prop-shop with a minimum funding requirement of five thousand dollars. After depositing, you will be able to exchange your trade without any restrictions in the pattern, and you will have access to leverage worth up to fifty thousand dollars.
Another aspect of the prop-shop is that they will usually have the most modern equipment and platforms to enter orders that can be used by traders. They will also generally offer education about the stock exchange and how it trades.
Prop-stores earn in various ways, one of which comes from marginal balances and order flow. But they also earn money on tickets for merchants using their services. Sometimes, the ticket fees cover the cost of a trading station and software, but these can also be charged depending on the company.
Footnotes
References
- Brav, A., Jiang, W., Partnoy, F., & Thomas, R. (2008). Hedge fund activism, corporate governance, and firm performance. The Journal of Finance, 63(4), 1729-1775.
- Brown, S. J., Goetzmann, W. N., & Ibbotson, R. G. (1999). Offshore Hedge Funds Survival & Performance 1989-1995. New York University-Salomon Center-Leonard N. Stern School of Business.
- Strawn S. (2013)The Properties Director's Handbook Focal Press Taylor & Francis Group, p. 129
Author: Klaudia Wróbel
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