Prop Trading VS Principal Trading: A Detailed Breakdown By A Real Trader

Financial markets are able to function at a high-paced and efficient level due to high amounts of liquidity available during trading hours. This level of liquidity does not happen on its own – the level …

Prop Trading VS Principal Trading

Financial markets are able to function at a high-paced and efficient level due to high amounts of liquidity available during trading hours.

This level of liquidity does not happen on its own – the level of supply and demand of any financial asset at any given time isn’t naturally similar or equal for someone to partake in a trade.

This is where principal traders come in.

To prevent the market from crashing or being too one-sided when trading any form of financial asset, principal traders are tasked with using their own company inventory and funds to maintain liquidity.

Principal traders can sometimes be miscategorized as prop traders. While there are similarities between the two, there are very obvious differences as well.

Therefore, I’ve put this article together to help you understand what principal traders do and how they differ from prop traders. This is prop trading VS principal trading.

What Does A Principal Trader Do?

Principal traders use funds out of their own firm’s account to buy and sell financial assets on the market.

By doing this, they take on a lot of risk, thereby providing consistent liquidity, which allows trade to remain continuous.

While liquidity is one of their main goals, just like any other trader, principal traders also aim to make profits by timing when they buy and sell assets or by creating a large enough spread between the buy and sell price of an asset to where they make a profit.

How do principal traders make a profit from the spread? The best way to explain it is with an example.

  • Let’s say a principal trader has bought Apple stocks at $100 – this is their buying price.
  • When a client wants to buy Apple stock, the principal trader will then sell it to that client at $100.50.
  • The difference between the buy and sell price is the spread, and that is how the principal trader pockets their profits.
  • The other way they make their profits is by smart investing and taking speculative long positions on certain stocks.

Principal Traders Are Also Referred To As ‘Broker-Dealers.’

A broker refers to someone that helps clients’ complete trades for an asking price.

Their role is to find a match between buyers and sellers of a financial asset at the best price possible while pocketing a fee for facilitating the transaction.

For their services, the broker is paid a commission, which is usually a tiny fraction of the value of the asset involved in the trade.

A dealer is someone that has an inventory of a particular financial asset which they sell on the secondary market.

The secondary market refers to holders of an asset selling shares on exchanges such as the New York Stock Exchange, whereas the primary market refers to when the company initially offers their shares such as IPOs.

A principal trader can be both a broker and a dealer, and according to the market condition known as the ‘suitability standard, they do not need to put the client’s needs ahead of their own, as long as they provide their services to reasonable expectations as stated by law.

What Does A Prop Trader Do?

Prop traders work in financial firms that provide them with a funded account of the firm’s own capital.

Prop traders are required to invest this money directly into the market with the aim of earning as much profit as possible.

Firms choose to use this method of investing as it can often yield higher earnings than working for commissions while trading with their clients’ funds.

New prop traders are often training under experienced traders in the firm they join.

To join an online prop trading firm, a trader generally has to go through a validation and verification process that can differ between firms. Upon successfully passing those checks, they are provided a funded account.

Traders earn a large amount of the company’s profits, which makes prop trading a very lucrative career path.

3 Differences Between Principal Trading And Prop Trading


One of the main objectives of a principal trader is to be a bridge between the supply and demand of certain markets to help reduce price volatility.

If there is too high of a demand for a certain asset with equivalent supply, a principal trader sells their company inventory of those shares until the volatility settles.

Principal traders act as brokers to help facilitate trades for their clients and work as dealers to provide shares for investors to buy.

A prop trader’s objective is to make profits for their firm. By using their firm’s capital, a prop trader implements multiple strategies to execute as many profitable trades as possible.

They do not look after client accounts and are only concerned with their company’s account.


Principal traders work in a firm for a salary. They can earn anywhere between $85,000 and $116,000. This means the earning potential for someone in this career has a limit.

Principal trading firms also earn a commission for each trade they facilitate for a customer.

A prop trader gets paid based on the profits they make for the company they work for. Prop traders get to keep anywhere between 50% – 90% of the profits for each trade they make.

This provides them with significant earning potential.


Since a principal trader’s duties revolve around stock market trading hours, they have set working hours to adhere to.

Prop traders tend to work for online prop firms, which means they can work from home. This means they are able to work whenever they want and for however long they want to.

While new prop traders may need to work longer hours, seasoned traders have set hours during the day when they trade, giving them a great work-life balance.

2 Similarities Between Principal Trading And Prop Trading


Both principal traders and prop traders use funding provided by their own firm’s accounts instead of utilizing that of their customers when it comes to executing trades.

Prop traders use company funds to provide profit for the company, while principal traders use company funds to provide liquidity to the market while pocketing profits for facilitating trades for their clients.

Market Making

While principal traders are market makers – they provide liquidity to ensure markets don’t crash due to uneven supply and demand – prop traders can also execute market-making trades per se.

When a prop trader takes the sizeable speculative position on a stock, they provide liquidity for others to trade with as a result.

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