How it works
Every manager can open a few PAMM accounts depending on a strategy applied. An investor opens an account with a broker, gets familiarized with the terms of the offer and transfers money to a manager’s PAMM account (press the “Invest” button in a portfolio invested, specifying a transfer amount) and then follows trading statistics in the personal profile.
Example. Let’s say an investor pays $1,000, manager’s fee is 40%, manager’s personal deposit is $1,000, and final profitability is 5%. Profit amounts to $100 (5% of $2,000). Before it’s distributed, Investor’s profit amounts to 50% (according to his/her investment share in the overall portfolio), but then he/she pays 40% of it. In the end, an investor’s net profit equals 100/2 * 0.6 = 30 usd.
Advantages of PAMM accounts as compared with asset investment:
- Investments in PAMM accounts are made automatically, profits are distributed automatically as well. An investor can see a manager’s offer wherever in the world. Topping up an account with a broker is enough. Concluding a contract with an asset management company and paying money is way more complicated and longer.
- PAMM’s relative transparency. An investor can see a deposit curve and a manager’s back test statistics. He/she can specify a character of a strategy used in a personal conversation and take his/her money back at any time (if the offer provides for it). The same information is often unavailable at asset management companies.
- Risk diversification. An investor chooses as many managers as he/she wants and allocates money the way he/she wants.
- Tax saving. A management company deducts taxes from profits in any case. A broker, unless it’s a tax agent, transfers tax responsibility to an investor. The latter is not really willing to share profits with the state, working with e-wallets.
Disadvantages of PAMM accounts:
- Relatively big manager’s fee. Most often, 20-50% of profits;
- high risks. As an example of Zulutrade has shown, most managers use Martingale and averaging practices. Or, even worse, they may be false accounts of dishonest brokers;
- complicated money withdrawals. In most cases, an offer provides for an early withdrawal fee (a fee for withdrawing money before a rollover takes place and profits are distributed);
- no opportunity to influence directly a trading course.
When PAMM accounts were all the rage, there appeared fully-fledged broker platforms dedicated to asset management services. Once the investors in such giants of the Forex market as MMSIC, Panteon Finance, and ForexTrend lost their money in full, the popularity of PAMM accounts somewhat cooled down. Initially, those platforms offered an interesting system of PAMM accounts where risks were halved between an investor and a manager, though such conditions were not beneficial to a manager as a matter of principle. However, investors were impressed, just like organisers wanted. In reality, those platforms turned out to be nothing but financial pyramids and the question “Did PAMM managers really exist” is still rhetoric.
Investors could no longer confide in PAMM accounts. So a new trading model appeared – Social Trading.
What is copy trading and how does it work?
Copy Trading or Social Trading means trading using a professional trader’s strategy with one essential difference: an investor does not make money transfers. He/she subscribes to a trader, and then copy trading begins. In other words, any position opened and closed by a professional trader is opened and closed in an investor’s account. Every client of a broker can be both an investor and a trader at the same time.
- all traders are the broker’s clients. Trades are copied instantly as they are all conducted on the broker’s servers. Delays and slippages are excluded (trading is done only in ECN accounts);
- a broker offers 4 copy trading options. Copying can be done with a full or a fixed size, with a predefined % of each trade or a fixed share of an investor’s funds;
- a broker is an intermediary between an investor and a trader, earning solely from spreads and standing surety for the both parties, without charging any commissions. A broker cannot access traders’ and investors’ personal accounts. The history of trades is recorded on the server and cannot be modified.
How it works
A social trading platform provides for every option to protect investors’ interests. Every trader has his/her investor password that excludes broker’s intervention in his/her trading. Prior to subscription, an investor can get the trader’s investor password in the live chat and ask any questions concerning the strategy. In his/her turn, a trader is interested in keeping a good reputation: the more investors he/she attracts, the more commission he/she will earn.
Remember: the PAMM model means a manager can fully dispose of investors’ money. There are real examples of platforms asking a manager to blow an investor’s deposit for a monetary reward. Otherwise, the manager could risk his/her account. In Social trading, a trader earns a commission for profitable trades and values his/her reputation. An investor can get detached from a manager at any time, which is impossible under the PAMM model.
