CFD Brokers vs Prop Firms: Complete Comparison

CFD brokers are a good option if you have your own capital. You can start trading almost instantly and don't need to pass an evaluation. Prop firms give you access to more capital (if you pass an evaluation), but you'll need to adhere to strict rules. If you have sufficient capital, a CFD broker may be better suited.

If you're looking to get into the trading space, but have wondered which is the best route, you're in the right place! There are several routes to trading the financial markets, with two of the most prominent ones being CFD trading and proprietary trading firms (Prop Firm trading). But, what exactly is each one and how do they differ?

At face value, the main differences are that you need to use your own capital to trade with a CFD broker. However, with a Prop Firm, you get access to a funded account and use the Prop Firm's capital to trade the market, if you pass the evaluation phase. It's worth noting that there is still a financial outlay with a prop firm, as you'll need to pay to join (and hopefully pass) the funded evaluation before getting access to live capital.

Both paths have pros and cons, and there isn't necessarily one-size-fits-all. In this article, we'll explain in more detail what each is, what you need to know, and the benefits and drawbacks to each one, so you can make a more informed decision.

What is a CFD Broker?

Let's start with CFD brokers. What are they and how do they operate? Essentially, they are an intermediary between you (the trader) and the financial markets. They provide access to trade CFDs (Contracts for Difference). These are not assets, but rather derivatives which track a specific underlying asset.

With CFDs, you never own the assets outright, but you profit when the underlying asset moves in the same direction as your trade. For example, if you're trading a CFD on Bitcoin, the outcome of your trade will depend on Bitcoin's price, although you will not own the asset directly.

The best CFD brokers like Seacrest Markets give you access to multiple asset classes like Forex, Crypto, Indices and Commodities, from one trading platform. You simply fund your account with your own capital, and either make, or lose money, based on what the underlying asset does.

Regulation is especially important in the CFD broker space and throughout the brokerage industry. Look for brokers with oversight from regulatory bodies like the FCA (Financial Conduct Authority), ASIC (Australian Securities and Investments Commission) or FSCA (Financial Sector Conduct Authority). This oversight provides a certain level of protection for traders.

What is a Prop Trading Firm?

Prop Firms are similar to CFD brokers in that they also provide access to trade the financial markets. However, the financial side of things is very different. With a prop firm, you pay to participate in an evaluation challenge, with most prop firms providing 1-step, 2-step, or 3-step challenge options.

With these challenges, the prop firm tests your ability to trade. You'll be required to meet certain profit targets and maintain good risk management. Then, if you pass the prop firm evaluation, you get access to trade the firm's capital (rather than using your own). In return, you split profits with the firm (usually 70-90% in your favor).

The appeal of prop firms is obvious. Prop traders can leverage substantial capital that they otherwise would not be able to access. This amplifies your potential return without risking a large portion of your own money (although you still need to pay to participate in the challenge).

The main downside to trading through a prop firm is that there are very strict rules. This is standard across the proprietary trading sector and not only apply to the evaluation phase, but right throughout your trading journey. You'll have to worry about daily loss limits, max drawdown rules and profit targets. There's also usually other rules around certain types of trading, like news trading.

Also, the mental pressure of managing someone else's money can affect traders differently. Some may struggle with it, but others may thrive under it.

Key Differences Between CFD Brokers and Prop Firms

We've already touched on the key differences between CFD brokers and Prop Firms. But to summarize, there are really four main differences, which are the following:

Capital Used

When you trade using a CFD broker, you are liable to deposit all the funds you will use for trading. Whatever your personal savings are that you've earmarked for trading is what you have to trade with. However, with a Prop Firm, you get access to trade the broker's capital (provided you pass the evaluation and get funded).

Profit Sharing

When trading with a CFD broker, whatever profit you make is yours to keep. But with a Prop Firm, you are required to split your profit with the firm based on their prop trading accounting structure. This is in exchange for them granting you access to their trading capital. You normally get to keep about 70-90% of all prop trading revenues, with the other 10-30% going to the prop firm.

Accountability Structure

When you trade using a CFD broker, you answer to no one except yourself. Regardless of how you trade, how much money you make or lose, you're the only one impacted. But with a Prop Firm, you are accountable to the Prop Firm and need to trade in line with their requirements. Failure to play by their rules will see your funded account removed (or failure to pass the evaluation process).

Cost Involved

With a CFD broker, there is usually no upfront cost to join, and the only costs you need to worry about are your ongoing trading costs, such as commissions and spread costs. With a Prop Firm, you need to pay an upfront cost to participate in a funded challenge, with no guarantee that you'll even pass and get access to a funded account.

Capital Requirements and Accessibility

It's easier for retail traders to start trading with a CFD broker, since there aren't really any upfront costs to participate. You will need capital to start trading with, but many brokers offer a low barrier to entry, and you can usually start trading with a few hundred dollars.

You do have access to leverage, though – if you choose to use it. This enables you to control a much larger position size and amplify your returns. It is however a double-edged sword, meaning it amplifies both returns and losses. For example, a $1,000 account trading with 1:30 leverage can control positions worth $30,000.

Prop firms make it easier to control large trading positions, if you pass the evaluation phase. To participate in the evaluation, you'll need to pay a once-off fee, which could be anywhere from about $50, up to a few hundred dollars. If you pass this phase, you'll get access to trade the firm's capital. You would be out-of-pocket for the challenge cost, and you'll have to split your profit with the prop firm.

What is the 2% Rule in Prop Firms?

Have you heard of the 2% rule in prop firms? It's more of a general trading rule – not only limited to prop firms, but enforced quite strictly throughout the prop trading industry. Basically, the rule states that you can't risk more than 2% of your account balance on any single trade. Some firms actually set this limit even lower, like 1% or 1.5%.

Here's how it works in practice:

If you're trading a $100,000 funded account with a 2% rule, your maximum risk per trade should be no more than $2,000. The way you actually calculate this risk is the distance from your entry price to your stop loss, multiplied by your position size. This forces traders to exercise disciplined position sizing.

The prop firms are strict about this rule to protect their own capital from excessive losing trades; however, it's good trading practice, regardless. In fact, even if you're trading with a CFD broker, this is a rule you should follow.

Personal Risk: The Psychological Impact

A big aspect of successful trading is being able to manage the psychological aspects of it. This takes center stage when it comes to choosing between trading with a CFD broker or trading with a Prop firm.

Typically, trading with a Prop firm may be easier from a mental viewpoint, since you're not trading with your own capital (assuming you've passed the evaluation). But some people may actually find it less stressful to trade their own capital. So, it really depends on your own mental state.

It's also worth noting that the pressure to pass the evaluation phase may be tricky for some traders to navigate and could cloud their ability to make the right trades at the right time, especially when there is time pressure involved.

The profit split aspect of trading with a prop firm is another consideration. Some traders might resent giving up a portion of their hard-earned profits, even if they are technically trading with a prop firm's capital. This can introduce psychological pressure of its own.

Which Broker is Best for CFD Trading?

Choosing a broker for CFD trading is a personal choice, and with CFD brokers operating globally, you should choose one you're comfortable with after doing your due diligence.

Plus, traders at different levels may value different things.

CFD brokers cater to different trading styles and experience levels. For beginner traders, a broker with good educational resources and a low minimum deposit may work best. More active traders need tight spreads and fast trade execution speeds. Every bit saved on spreads directly impacts your profitability, which really adds up if you're training often. For swing and position traders, overnight fees become an important consideration.

Regardless of what type of trader you are, regulatory oversight is important. With so many options in the trading platform market, look for a user-friendly platform and good customer support. There's nothing worse than being left in the dark when you need support.

Seacrest Markets combines competitive spreads with transparent pricing and reliable execution across multiple asset classes, and human support if you need it.

How to Choose Prop Firms

Choosing a prop firm also requires due diligence – perhaps even more so than a CFD broker, especially given how competitive the prop market has become. You also need to consider other things like the challenge fee and profit split arrangement.

You'll also want to verify the firm has a reliable payout history, which reflects the integrity of their prop trading business. This is especially important when evaluating new proprietary trading firms with limited track records. Do your research using the online trading community globally, including forums, Reddit and online reviews – to ensure there isn't a recurring pattern of clients complaining about not receiving payouts.

Then, compare the evaluation fees and profit split percentages. But remember to also factor in the firm's trading rules such as drawdown limits, profit targets and any other restrictions. Just because a specific firm has a lower evaluation fee or better profit split does not mean its rules are necessarily more favorable.

Also consider if the firm has scaling opportunities. Is it possible to scale your account as you prove yourself trustworthy? A good prop firm will reward consistent traders with more capital and empower them to build a legitimate trading career.

Seacrest Markets offers transparent, achievable rules, focusing on trader success rather than evaluation fee revenue, striving to create a genuine alignment between trader and firm.

Advantages of CFD Brokers

The main advantage of a CFD broker is that you maintain full control over your capital, all the profit and can choose any trading style you wish to employ. Unlike a prop firm, you aren't limited to how you trade and aren't obliged to split your profits with anyone.

The barrier to entry is also straightforward, and there is no challenge you need to pass before you can start trading.

Here's a summary of the key advantages:

Advantages of Prop Trading Firms

Prop firms help solve the capital limitation problem that many retail traders face. For a modest evaluation fee, you can potentially get access to trade a significant amount of capital. The only personal financial risk you carry is the evaluation cost, which could be a few hundred dollars.

This arrangement allows skilled traders with limited personal funds to generate substantial income with limited outlay of their own capital. Quality firms also provide institutional-grade trading conditions through partnerships with non-bank liquidity providers, offering tighter spreads and lower commissions, which translates to better profitability on each trade, especially for active strategies.

Although some traders may see the strict rules prop firms usually have as a negative, it can help traders stay on track, maintain good risk management and be more disciplined. Lastly, many prop firms also offer good education resources, mentorship and an active community to help traders develop their skills.

Here's a summary of the key advantages:

Choosing Based on Your Trading Strategies and Situation

At the end of the day, there's no simple answer as to whether CFD brokers are better than prop firms. What's more important is your individual circumstances, and what is best for you personally.

Firstly, how much capital do you have to trade with? If you have a decent amount like $5,000 or more, you may be better off going with a CFD broker so you have full control over your account, and all profits are yours to keep. However, if your personal funds are limited, but you can afford the evaluation fee at a prop firm, that's probably a good option, provided you have a proven trading strategy.

You also need to consider your trading strategy. Do you have a specific strategy which will be limited by the stricter rules prop firms have in place? For example, do you like trading around news events? If so, consider what limitations there may be before joining a prop firm. Also, weigh up the mental aspects of the two. Would trading with your own funds put too much mental pressure on you? Or maybe it will free you up to trade how you want?

At the end of the day, what works for you may not work for someone else. But the real edge is not so much in the route you choose, but more in actually having a repeatable, good trading strategy.

Research Team

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