Before starting to invest, any investor should familiarize himself with the entire palette of financial instruments that he can use in order to competently and carefully work out his earnings strategy. In this article, we analyze such an important part of your financial arsenal as PAMM accounts.
What is a PAMM account?
If not the first day in investing, you probably heard about investment funds, such as mutual funds or ETFs, which work approximately according to the following scheme: you, together with other investors, transfer money to the fund, the latter undertakes to invest and show a certain return, in return You are issued with securities that testify to your contribution to the fund, as well as give the right to receive dividends and return your capital. Thanks to funds, even with a small capital, you can diversify your risks by investing, as it were, a little in a variety of stocks and bonds.
PAMM accounts have the same purpose, to transfer money into trust with someone in order not to track all the calls of the financial market online, but this is done with some reservations. Firstly, in the case of a PAMM account, no general fund is created, you simply link your account to the broker's account, proportionally repeating all his operations. Secondly, the broker does not directly manage the funds received, but does it indirectly, through his capital. Well, and most importantly, the broker first of all risks not with your money or the capital of the fund, but with his own personal funds.
How do they work?
Now I will try to explain in more detail how PAMM accounts work. Suppose you are a broker and you have capital of $ 100,000. This is already quite a decent amount, as for a novice investor, but you are still far from large offices.
How to raise additional funds? You can create the same fund, but for it you need more capital and investors should be found in advance, and who wants to invest in a broker with hundreds of thousands, even with the most excellent financial statements? It is in this situation that PAMM accounts come to your aid. You offer depositors not to transfer money directly to you, but to link it to your account. That is, if you have 100,000, and the depositor has 1,000 dollars, then if you invest 10% of your capital in shares of company A, the same is done on the PAMM account linked to you.
But what is your benefit? Firstly, you can increase your turnover, and secondly, you get a small commission for using a PAMM account linked to yours. And what about the investor's benefit? And the investor's benefit is that he can invest his capital fairly competently with minimal participation.
Of course, PAMM accounts are not an ideal financial instrument and not a panacea for investors, working with it you will discover many pitfalls and subtleties that we will try to understand in one of the following materials.