You may have heard about PAMM accounts for forex trading, and might have wondered what they are. In essence, a PAMM account allows one trader – the manager – to make trades on behalf of other investors who are not actively involved in forex trading.
In a way, you can think of this as being similar to the way a stock market mutual fund works – although there are some significant differences.
How does a PAMM account work?
First of all, a manager opens the account, and designates a part of his investment as manager’s capital. The manager is unable to make withdrawals against this capital, which is intended to assure potential investors that the account will be managed responsibly.
The manager then advertises the performance of the account, along with the conditions they are offering other investors who want to join – for instance, how much of the profits the manager will retain for trading on behalf of the investor. This is typically done through the forex broker, who acts as a guarantor of the transparency and security of the PAMM – but is not responsible for any losses.
Investors then decide to invest in particular accounts, and the profits or losses are then shared out at the end of each trading period between the manager and the other investors. The forex broker may administer the distribution of funds, acting both as a regulator and a sort of escrow service.
What are the advantages of PAMM accounts for managers?
For successful traders, the advantages of a PAMM account are fairly obvious. It gives them the opportunity to act as an account manager, making profits not only off their own money but off of the trades they execute on behalf of their investors. They are also able to set their own conditions – which investors must obviously sign up for – giving them a degree of control over the trading conditions, such as how profits are distributed and what the trading period is. Because the funds are distributed automatically, this also precludes any risk for the account manager arising from fraud on behalf of the investors.
What are the advantages of PAMM accounts for investors?
For investors, contributing to a PAMM account has multiple advantages. Firstly, they benefit from the trading expertise of successful managers. Secondly, they can withdraw from the PAMM at any time if they are unsatisfied with how the account manager is performing. Thirdly, they can diversify their investments across multiple PAMMs, reducing risk. Finally, they are also protected from fraud because of the automatic funds distribution mechanism.
