Investing in PAMM-accounts

Exchange trade offers many options for investment. If at the dawn of its formation people could invest in certain goods or securities, now they have the opportunity to buy and sell futures, options and other instruments. However, work on the stock exchange is associated with a high risk. To obtain a high profit in securities trading, the modern market offers investment in the PAMM-account.

What is a PAMM-account?

First of all, you need to understand what PAMM accounts are and how they work. Answers to both questions will give an opportunity to determine whether the given investment brings profit for investment or not.

Forex  PAMM-accounts is a trust management of players accounts on the exchange. Players provide access to their tools for experienced traders, losing the opportunity to independently perform transactions in the market. The name PAMM is deciphered as a percent allocation managment module.

At the initial stage of the PAMM-investment development the work with the new tool was very risky. There were no agreements between traders and small players, so the first ones often used this situation, earning money only for themselves. The bitter experience of investors at the time when the investing in the PAMM-account was born pushed many away from such a trading instrument.

Later, a new system was introduced with the following features:

  • To invest in the PAMM-account players must accept the terms of the standard form contract, after which they get access to the trades;
  • Access to one account, which is opened by the management company, is presented for an unlimited number of players;
  • All works go through an automated system;
  • The presence of an arbitrator who resolves disputes between the manager and the investor;
  • To receive earnings on the PAMM-accounts, the manager needs transactions to bring profit.

That is, the PAMM’s profitability for managers is composed of percentages of the profits received through the transactions on the exchange.

To make it easier to understand how this system works, the following example can be cited:

A potential investor has accumulated 100 thousand rubles. He decides to invest in financial instruments. Without the knowledge and experience of working on the exchange, a person invests funds in the PAMM-account. The money is transferred to the trust management of the company for a period of 30 days with the condition of return of investments and interest. After 1 month,  the money are returned to him including original 100 thousand rubles and 20 thousand rubles of dividends.

In the example above, the PAMM’s profit was 20%. This way of earning has many advantages. From this list, you can distinguish two main advantages that are common to the PAMM-investment:

  • The investor does not need to regularly monitor stock indexes and other information that affect his level of earnings (all the work is performed by the manager);
  • Full transparency of the manager actions.

The investor can automatically monitor PAMM’s indexes and check how the manager operates. At the same time, the arbitrator regularly checks the nature of the conducted transactions to ensure compliance with the current legislation.

Principle of operations

One PAMM-account always combines several accounts. At the same time all the money invested in the lesser accounts is collected in a single pool, which is managed by the trader. However, an investor can only withdraw his reward.

For example: one person invested 200 dollars, and  the second invested 400 dollars. The total pool is 600 dollars, which is managed by the trader. Let’s say the PAMM’s profit was 10%. As a result, the first investor can receive only 220 dollars, and the second 440 dollars less the brokerage commission.

The management company must also make a certain deposit when opening a new account. In fact, it acts as the first investor. This rule is specified because of the fact that the manager along with other investors also risks his money. Therefore, he will be responsible for choosing the right operations.

The mechanism of investing in the PAMM-account is as follows:

  1. Opening of a new account. The manager makes a request to a particular broker. After that, he deposits his funds.
  2. Acceptance of the offer. After the opening of a new account the manager publishes a contract on the basis of which there is interaction between him and investors. The investors must accept the offer, if they want to transfer their funds. This agreement obligatorily establishes several important conditions:
    • The minimum amount of the PAMM-investment;
    • The time during which the investor can not return the invested funds;
    • The commission of the manager, which consist of a percentage of the profits (usually 30-50%).
  3. Investment. Before you invest your own funds in this instrument, it is recommended  you to read the current rating, which takes into account the PAMM-indexes.
  4. Receiving a profit.

An important feature of investing in a PAMM-account is that all the risks, associated with this instrument, are evenly devided among all participants of the account.

There is also the concept of «trading period». It means a certain time period, during which a remuneration is paid to the manager. As a result of such actions, the composition of the account is changed.

For example: 3 investors invested 100, 200 and 300 dollars respectively. The manager invested in the account of 1000 thousand dollars. The level of profitability of the conducted operations was 10% and the commission is equal to 50%. After profit redistribution the first investor received $105, the second $ 210  and the third $ 307.5 respectively. The manager eventually earned $100 on transactions and $ 22.5 on its commission.

After the income is redistributed, the PAMM indexes change.

As with other instruments of the stock market, such accounts are often combined into PAMM-portfolios. The latter allow to diversify risks and increase the chances of making a profit. Such portfolios combine several PAMM-accounts. The organization chart and the principle of operation of these instruments are usually the same.

Advantages and disadvantages of PAMM-accounts:

The following advantages of investing in PAMM  can be distinguished:

  1. A small amount of investment. In the PAMM-account you can invest relatively small funds.
  2. There is no need to get trader education. All operations on the exchange are conducted by experienced players.
  3. No fraud. A trader can only manage money, but cannot take them out.
  4. Absence of temporary restrictions on the withdrawal of funds.
  5. Full transparency. All operations carried out by the trader are displayed in the personal account of the PAMM-account participant.
  6. The interest of the trader in obtaining income.
  7. The opportunities for risk diversification.  There are various ratings that take into account PAMM-indexes of managers, and PAMM-portfolios.

The main risk of investing in the PAMM is that traders are not insured  from making mistakes. Any wrong actions of managers can lead to the fact that investors will lose all their invested funds.

Selection of the manager

There are three strategies for conducting exchange trading using PAMM-accounts: aggressive, conservative and moderate. They determine the degree of risk that investors bear, and the level of profitability. With aggressive strategy managers use more than 40% of the funds available to them; at moderate — 15-40%; with conservative — less than 15%.

When choosing a manager, it is necessary to take into account these indicators, as well as the PAMM-indexes of the first one. To determine the trader who will manage the investor’s money, it is necessary to consider the following:

  1. Experience of the trader. It is recommended to invest in PAMM-accounts existing for more than one year.
  2. Level of risk. Depending on the strategy of behavior in the market, traders are ready to suffer certain losses. Such situations are known as drawdowns. It is a percentage of the deposit total amount. With an active strategy, the drawdown exceeds 50%, and the conservative approach provides a degree of risk of less than 30%
  3. Level of profitableness. It is recommended that you pay attention to annual indicators and changes in profitability throughout the life of the PAMM-account.
  4. The size of the manager’s investments. The higher it is, the greater the interest of the trader.
  5. The volume of outside investments. The more investors participate in the PAMM-account, the more trust the manager has.
  6. Rating.

It is important to understand that the level of profitability and risk does not always depend on the actions of the manager. The investor should also regularly monitor the situation associated with his money. For example, if one of the PAMM-accounts began to incur losses, you should withdraw funds from it.

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Trading Forex on margin offers good opportunities to receive high profit, and carries a high level of risk. Prior to trading you should make sure you fully understand all the risks involved and take into consideration your level of experience and financial situation.

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  • Tuesday, December 15, 2015
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