Equity-based investment instruments are increasingly more profitable than classic private equity methods. And among all variants of investment of funds on a unit basis the most attractive are the PAMM-accounts, allowing the investor to entrust the management of the capital to the expert capable to dispose of them much more effectively.
What is a PAMM account?
PAMM-account is a type of trading accounts on Forex, providing for external investment – with the participation of private investors. Creates such an account as a trader-manager, who also takes part in the formation of the total amount of capital. The funds received within the framework of co-financing are used for further trading on Forex. And the profit or loss from the performed trading operations is distributed among all investors according to their shareholding volumes.
The very concept of PAMM is just an abbreviation (PAMM – Percentage Allocation Managemant Module), which is deciphered as a module of percentage distribution control. Simply put, it is the structure of a PAMM-account that allows for a share participation in investment on relatively safe conditions for investors. Namely, the formation of capital on the main trading account is done by opening individual accounts. They are opened by the investors, who are able to independently monitor changes in the account status and withdraw funds if necessary.
Work within the framework of the PAMM Account is carried out on the basis of an offer – an agreement defining the rights and obligations of the parties. In particular, it regulates such issues as
- Percentage distribution of income/losses between investors and a trader-manager;
- investment terms;
- conditions for withdrawal of funds from the account (including early withdrawal)
It is important to take into account that in addition to the investor and the manager in the work of the PAMM-account there is always a third party – PAMM-service or a platform belonging to the broker, in which all operations on the accrual / write-off of funds are carried out.
How to earn money on a PAMM account?
Investment attractiveness of PAMM-accounts is undisputed – they demonstrate high profitability and are available even to investors who do not have significant amounts of funds for the purchase of shares. But, of course, the prospects for higher incomes are also subject to higher risks. In particular, when investing money in a PAMM-account, the investor should understand that from this moment on, he will suffer losses in solidarity with other owners of units/investment capital shares and receive income only in case of successful work of the trader-manager.
Investment in a PAMM Account cannot be successful if the work is done through an unreliable broker or a company that provides a PAMM platform for traders. Actually, to find a broker who will guarantee transparency and reliability of trader’s work is the first thing that should be done by a novice investor wishing to invest funds in trust management.
And only after you choose a brokerage organization, which you are ready to trust, you should proceed to the choice of a trader, who will manage your capital within the PAMM-account. It is worth noting that each company has its own ratings of managers, which are available for study and analysis to all comers. Pay attention not only to the profitability of accounts under the control of a particular trader, but also to the overall dynamics of his trade. Instability of indicators is a sure sign that the manager is inclined to choose risky tactics in investment. This, in turn, increases the risks for investors.
How to earn money on a PAMM account? Remember the golden rule that warns of the dangers of placing capital in one “basket”. Diversify the risks by distributing funds between multiple accounts. In this way, you will protect yourself from global losses and increase your total return on investment.
Before you start making money, it’s important to learn not to lose. Want to reduce trade risks? Do not be afraid to set loss limits for a trader. Determine the degree of risk you are willing to take in advance, and you will protect yourself from the risk associated with the manager’s mistakes.
Read more about methods of reducing the risk of trading in the article 10 of the methods of risk management in Forex
Before you invest real money, try your luck in virtual reality. Demo account on the chosen PAMM platform will help you to understand all the intricacies of investing in trust. And it will prevent many investors from making mistakes that they do not know because of the lack of experience, necessary skills or a trivial lack of information.
How to choose a PAMM-account?
When choosing a PAMM Account, it is best to follow the following rules:
1) The first thing that is worth knowing is that there are large brokerage companies operating in the Forex market, providing support and access to the work of hundreds and thousands of traders, as well as small agencies providing trust management services within the framework of their own PAMM-accounts, opened directly by representatives of the company.
At first glance, in the case of a private company, the investor can count on the personal responsibility of its employees. In practice, however, the limited choice may lead to the fact that the manager will not have enough trading experience. Paying attention to large brokerage agencies, you can secure yourself by selecting a trader-manager based on ratings and objective data on his activities within the selected PAMM-site.
2) Stability is a sign of skill. This simple rule perfectly illustrates the situation in the investment market. Choosing between a manager who has been working steadily for a long time and a “star” of the market who demonstrates both ups and downs in his work, it is necessary to give preference to the first option. Simply because the main principle of any Forex investor is the opportunity not to lose where you can save it.
3) Profitability is the main thing that attracts investors. Refuse to consider overly tempting proposals in favor of more realistic prospects. Speaking of figures, the profitability of 100% per annum for a PAMM-account is quite acceptable. Ultra-conservative traders offer about 40 – 50% per annum. Anything that exceeds these indicators needs to be considered separately. Remember that high profitability always goes hand in hand with the increased risk of losing all invested funds.
4) Account drawdown is another important indicator that should be taken into account when choosing a PAMM Account. If a trader-manager is inclined to make risky deals and is not ready to stop even after receiving significant losses, it is a reason to refuse to cooperate with him. However, moderate risk indicators of transactions indicate that the trader is working with a certain degree of caution, and therefore the risk of unjustified losses in this case will be much lower.
5) Manager’s share of participation is an indicator of his confidence in his own abilities. It is normal to have a shareholding of 30 – 50% of the total amount of funds invested. Lower indicators demonstrate a reluctance to risk their own funds. And if a trader is not sure of himself, how can he be trusted? Learn more about choosing a trader in the article How to choose a PAMM Account Manager?
How to form an investment portfolio?
Sooner or later, every investor faces the notion of an “investment portfolio”. What’s in it and what’s it even for? In fact, this “portfolio”, in the case of Forex, is quite conditional in nature and represents the totality of all investments that bring in or are able to bring in a passive return.
The investment briefcase could be:
- aggressive, with returns of 150% p.a. and more than 60% of investment risk;
- conservative, with risk indicators not exceeding 30% and yield not exceeding 50% per annum;
- moderate, with a yield within the range of 60-100% per annum and risk indicators not exceeding 50%.
In accordance with the choice of the investment portfolio, it is worth choosing PAMM-accounts for placing funds. For an aggressive portfolio it will be appropriate to place 60 percent or more of the funds in accounts with a rather risky style of investment management. The remaining 40% is distributed among the less risky options that serve as a sort of loss stabilizer.
The ideal scheme of portfolio formation in the sphere of PAMM-investment assumes distribution of funds between several accounts in the following proportion:
- 40% in conservative PAMM accounts (two or three);
- 30 – 50% in moderate (average risk PAMM accounts, funds, indices);
- 10 – 30% – in aggressive PAMM accounts.
Why is it so important to keep a reasonable balance when building an investment portfolio? Because this approach allows us to guarantee stable income from the conservative part of the portfolio. Highly risky investments give an opportunity to earn not only on insignificant fluctuations of the market, but also on serious changes of trends and other circumstances which can be regarded as perspective for reception of high profitability of investments.