{"term":{"slug":"what-is-a-prop-firm","term":"What Is a Prop Firm?","definition":"A proprietary trading firm that funds traders with firm capital in exchange for a share of profits. Modern retail prop firms charge a one-time evaluation fee, test traders through a simulated challenge, then provide a funded account to traders who demonstrate consistent rule-following and profitability.","extendedExplanation":"The retail prop firm model emerged around 2015 and fundamentally changed how individual traders access institutional-scale capital. Before this model, accessing significant trading capital required either working at a financial institution, raising private investment, or risking your own money. Retail prop firms removed these barriers: pay a small evaluation fee, pass a defined challenge, and trade a $25K-$400K account with the firm's risk capital.\n\nHow retail prop firms make money: evaluation fees are the primary revenue source. Most traders fail evaluations (industry estimates suggest 80-95% failure rates), and each failure requires a new fee to retry. Successful funded traders generate a revenue share for the firm from ongoing profits. Some firms also earn from spreads, commissions, or platform fees. This business model means firms are financially viable even if most traders are unprofitable.\n\nNot all prop firms are equal. The industry has seen several high-profile collapses where firms accumulated evaluation fee revenue without properly capitalizing the funded accounts, then failed to pay traders. When selecting a firm, look for: established payout history (years, not months), transparent rules with no hidden clauses, regulated status or reputable incorporation, and active community feedback. Firms like FTMO (founded 2015), TopStep (founded 2012), and Apex (founded 2021) have multi-year payout track records.","exampleWithNumbers":"Retail prop firm economics: a firm sells 1,000 evaluations per month at $200 average fee = $200,000 monthly revenue. If 10% of traders pass (100 traders), those 100 receive $100K funded accounts. If funded traders average $1,000/month profit, the firm keeps 20% = $200/trader/month * 100 traders = $20,000/month from profit share. Evaluation fees ($200,000) dwarf profit share ($20,000). This explains why firms prioritize challenge sales and why evaluation rules must be strict enough that most traders fail.","category":"evaluation","relatedTerms":["evaluation-phase","funded-account","challenge-fee","payout-split","trailing-drawdown"]},"_links":{"self":"https://runvigil.app/api/glossary/what-is-a-prop-firm","page":"https://runvigil.app/learn/what-is-a-prop-firm","allTerms":"https://runvigil.app/api/glossary","learn":"https://runvigil.app/learn"}}