Banking Practice Exam 2025 - Free Banking Practice Questions and Study Guide

Proprietary trading refers to when an investment bank or financial institution uses its own capital and balance sheet to trade financial instruments for direct profit, rather than on behalf of clients. This means the bank is taking on risk with its funds, engaging in buying and selling securities, derivatives, or other financial products exclusively for its own account. This strategy can be quite lucrative but also carries significant risk since the institution is ultimately responsible for any losses incurred.

In contrast, underwriting involves guaranteeing a certain price for securities on behalf of issuers, which does not involve the bank investing its own money directly. Market making is focused on providing liquidity to the market by buying and selling securities to facilitate trading without the intent of taking a direct position for profit. Brokering, on the other hand, means acting as an intermediary between buyers and sellers without taking market risk on the transaction themselves. Thus, proprietary trading distinctly highlights the involvement of the investment bank's own funds to engage directly in market risk for potential profit, which is why it is the correct choice.