If you are trying to determine whether to choose a career path as a proprietary trader or investment banker, you have various factors to consider. Both roles occasionally intersect in similar sectors, but there are differences to consider.
Let’s get into the details of what both professions do and how to figure out which route to go.
What Is Prop Trading
Prop trading is a short form of proprietary trading. It refers to a financial firm that invests its own capital for direct profits resulting from trading this capital in-house. A prop trader gets hired to trade the firm’s capital and gets paid with a smaller fixed income stream and a meaningful profit share based on the profit he makes for the company.
Prop trading is popular in the United States, the United Kingdom and the United Arab Emirates.
In terms of tradable assets within a prop firm, trading stocks, futures, currencies and bonds is possible, either from a local office or remotely.
What is Investment Banking
Investment banking is more complex than proprietary trading, organizing complex financial transactions like reorganizations, mergers and acquisitions. A main differentiator from prop trading is that the absolute amount of capital is significantly higher.
Investment bankers work with big corporations and even governments, where the expertise of financial professionals in various financial aspects of large and complex projects is needed.
Instead of managing its own money, the investment bank gets paid for its work. This can be used to evaluate a company’s worth during initial public offerings or M&As.
What Is The Better Choice?
Both starting a career as a prop trader and starting a career as an investment banker offer immense potential income streams. An excellent knowledge of math, exceptional analytical skills, and a strong will to succeed help in both career paths. Still, as a prop trader, you’ll also need a deep understanding of coding, AI, algorithms, and high-frequency trading.
That’s because classic prop trading firms focus on automated trading these days. On the other hand, investment bankers should have a deep understanding of economics and excellent communication capabilities for client work, meetings, and negotiations.
Potential for Investors
Both career paths in big prop trading houses and investment banks require an MBA from prestigious schools as a minimal degree. The better your degree, the better your chances of getting hired with a reasonable salary are.
Recent developments in proprietary trading have also opened the doors for investors with excellent trading and financial market skills. A degree is optional to join a prop firm if you are willing to prove that you have the skills they are looking for. While this is an ample opportunity on the one hand, in reality, most private prop trades fail in their trading challenges due to lack of knowledge, impatience, and greed.
That’s why it’s essential to compare the offerings of prop firms and evaluate whether prop trading is suitable for you.
Wrap Up
Joining a proprietary trading firm in New York, Chicago, or London requires an excellent degree from a leading university, outstanding knowledge of finance, and the will to work 12-16 hours per day in an office.
A prop firm challenge can be an excellent alternative for investors who want to work remotely and are willing to invest money in a prop firm challenge to find out if proprietary is right for them and to see if getting funded is a realistic scenario.
