Below is a comparative breakdown of the characteristics of cash trading, margin trading, and prop trading.

	Capital Requirement	Leverage	Risk exposure	Potential for profit
Cash Trading	huge	not present	minimum	low
Margin Trading	low	present	high	high
Prop Trading	none	present	Very low	high

CASH TRADING

Cash trading refers to purchasing and selling securities using cash rather than borrowed capital or margin.

CAPITAL REQUIREMENTS

Cash trading involves trading securities with the amount of available cash in one’s account. This also means you must have total cash to buy any asset. For example, if you want to buy $5,000 worth of stock, you must have at least $5,000 in cash in your account.

Also, there is no option to lend additional capital for cash trading. All this makes cash trading pretty simple compared with margin accounts because it is less complicated and has fewer requirements.

LEVERAGE

There is no leverage in cash trading. You’re simply trading on a cash basis, not magnifying your buying power or risk.

Because you are not borrowing any money, the returns or losses you reap will reflect only the cash you initially put into an investment. With leverage, your potential for profits will remain, but fortunately, you will not be in debt to any broker.

RISK EXPOSURE

As a rule, cash trading is less risky than other types of trading since you invest only your own money, excluding the extra risk of borrowed funds. The amount of cash you invest caps your loss if a trade goes wrong. Unlike margin trading, your loss could be more than you initially invested. 

The risk of cash trading is confined to the available funds in your account. Therefore, cash trading is safer, especially for conservative or risk-averse investors.

POTENTIAL FOR PROFIT

In cash trading, the profit you can make is directly proportional to the amount of cash in your account, which can limit your profit. 

The lack of leverage means that your account is less likely to witness fast growth with huge profits. Cash trading will work when the investor is long-term and desires to gradually build up their portfolio by reinvesting gains without taking debt and interest costs.

MARGIN TRADING

Margin trading refers to using borrowed funds from a broker to trade a financial asset, which forms the collateral for the broker’s loan.

CAPITAL REQUIREMENTS

Margin trading is when you take a loan from your broker to purchase securities, further extending the purchasing power you would have if you had cash on hand. In addition to the initial margin, brokers define the maintenance margin as the minimum account balance a trader must maintain to continue holding their positions. 

You can access margin trading from stock prop firms such as FTMO. FTMO provides a maximum leverage of 1:100 across all account types. This means you can control up to 100 dollars in trades for every dollar in your account.

LEVERAGE

Leverage is at the core of margin trading. You can hold much larger positions with smaller initial investments by leveraging or borrowing money from your broker. FTMO offers a leverage of 1:100 for the standard account and 1:30 for a swing account.

FTMO

Leverage can significantly magnify profits if the trades go in your favor; likewise, it will bring extreme losses if they go against you. Leverage will tend to increase the potential return, but it also increases risk. Therefore, margin trading requires good risk management.

RISK EXPOSURE

Because of leverage, margin trading carries a far greater risk than cash trading. With margin, the potential for your losses is magnified: if the value of your position decreases, you lose not only your initial investment but also the amount you have borrowed. 

POTENTIAL FOR PROFIT

The potential for margin trading profits becomes significantly higher through leverage. This is because you can take larger positions than if you were only cash trading. Any gain in the asset’s value applies to the total leveraged amount. For instance, when you put in $5,000 and borrow another $5,000, a stock rise of 10% would then result in a $1,000 gain. Because you have only invested $5,000 of your own money, this is a 20% return on your initial investment.

PROP TRADING

Prop trading is the practice of trading activities using the capital of a prop firm or financial institution rather than their own. Trade the Pool is an example of such a financial institution.

CAPITAL REQUIREMENTS

The best part of prop trading is that you are not required to bring in a lot of capital. Stock prop firms such as Trade the Pool will give you all the money needed for the account once you have passed their evaluation. Prop trading through TradethePool is advantageous because it requires minimal personal investment and larger access to capital.

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LEVERAGE

Prop firms very often offer leverage to increase the trader’s buying power. The level of leverage in prop trading depends on the policies of the firm concerned and the type of assets a trader trades. FTMO gives traders access to leverages of up to 1:100

Leverage equals more Buying Power. Prop firms give traders leverage to hold positions more significant than their account balance would allow.

RISK EXPOSURE

One of the most considerable advantages of prop trading is reducing personal financial risk. Since you trade with the firm’s capital, the personal financial exposure is minimal as opposed to margin or cash trading:

Financial risks to the trader are usually limited to an upfront assessment or subscription fee. You aren’t risking your money with every trade, so if you incur some losses, they don’t affect your bank account.

POTENTIAL FOR PROFIT

Prop firms provide large amounts of trading capital to make a profit. The trader’s earnings are based on a more significant base than his funds would provide, greatly increasing the profit potential compared to cash trading.

Most prop firms offer a profit-sharing model in which traders keep a percentage of their profits, sometimes around 70 to 90 percent. This implies that even though one might not retain the entire profit, one still benefits from substantial earnings from the firm’s capital.

CONCLUSION

You can choose to trade in various ways. Each trading type has advantages and disadvantages, whether cash, margin, or prop trading. Enrol on FTMO or Trade the Pool today to try a trading method that suits you.