Friday 21 July 2023

What is meant by proprietary trading?

Pro trading India | Image Resource: geomarkets.com

Proprietary trading is when a bank or a financial firm invests on behalf of its clients for a direct market gain rather than earning commissions. It may involve stocks, bonds, commodities, currencies or others. It occurs when a financial firm chooses to profit from market activities. It is also called ‘Prop trading’.

The proprietary traders use strategies like fundamental analysis, index arbitrage, merger arbitrage, statistical arbitrage, volatility arbitrage, technical analysis and global macro trading. This type of trading happens when a trading desk at a financial firm uses its capital to perform self-promoting financial transactions.

This trading desk is usually ‘Ropped off’ from the other trading desks as it is responsible for a portion of the revenues that are not related to the client's work.

Financial firms engage in proprietary trading because they believe they have a competitive advantage that can help them earn an annual return that can exceed the index investing or bond yield or others. The firms use their own fund rather than the clients to conduct the transactions.

This type of trading helps the institutions to maintain the full amount of the gains earned from the investment. It helps to boost the institution’s profits. The prop trading desks help them to remain autonomous and ensure that the institution is working in the interest of the client.  

Benefits of proprietary trading

This type of trading offers many benefits to financial institutions or commercial banks. They can earn higher quarterly or annual profits. When it trades on behalf of its clients it can earn revenue in the form of fees and commissions. This may be a small percentage of the total amount invested but it allows the institutions to realise 100% of the gains earned from the investment.

The institutions can create a stockpile of inventory of securities which helps them in two ways. Any inventory offers unexpected advantages to the clients. It helps the institutions prepare for down markets when it becomes difficult to buy/sell securities in the market.

It allows the institutions to become market makers by providing liquidity on securities.

Trading in the stock market 

Now there are online trading apps available to trade in the stock market. To trade like a professional in the stock market you should follow strict rules. The apps allow pro trading India in stocks, bonds and ETFs for a small fee per order. The apps also provide tools and tips to help make the right trading decisions. 

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