Basically, PAMM-account is a form of trust management of the traders` collective assets, where the service providing broker realizes the shares` calculation, which provides the equal rights to all traders and allows to separate at any moment the part of total assets, which belong to one or another trader. At the end of the trading period the profit, gained at the PAMM-account, is apportioned between all participants (investors) of PAMM-account, and the Managing Trader receives the reward specified in the contract, which can be represented in percentage terms from the total profit for the trading period.
All investments and transfers in the framework of PAMM-system are controlled by PAMM service providing company automatically, this guarantees to all its participants the security, transparency and consideration of all operations inside the system.
Example of the PAMM-system functioning
PAMM-accounts are divided into two types: PAMM-account of Investor and PAMM-account of Trader. Investor’s PAMM-account can only invest funds in the accounts of PAMM-Traders. PAMM-account of Trader can only accept the investments from the accounts of PAMM-Investors.
- Managing Trader registers the account and replenishes it in amount of N dollars;
- Managing Trader gets the first Investor who funds account with X dollars. Managing Trader starts trading;
- Then new Investors come into the deal and each of them invests different amounts of money (from 1 to hundreds of thousands of dollars). Each Investor gets the exact percent from account which is due to him at the moment of investing;
- Some Investors decide to return their invested funds fixing their profits in the account;
- Other Investors continue keeping their interests in the trading account;
- Trader withdraws a part of his interest.
All mentioned above operations are carried out in automatic mode arranged by the company. Any time Investor may request a refund of his share from the PAMM-account together with the profit. A part of the profit is paid to a Trader at the moment of Investor`s money refund as a payment for Managing Trader`s work. The percent of profit paid to Managing Trader is set by him in the settings of his PAMM-account and is available for all potential Investors.
Trader Intomillion has been trading Forex successfully for several years. He decides it’s time he should start earning some additional income for his trading skills and opens a PAMM Account with InstaForex and becomes its manager. Then he makes a proposal to potential Investors to invest in his PAMM account. He begins with 10,000 USD as the Manager’s Capital (his public investment in the PAMM Account, which serves as a guarantee to investors that he will keep their interests in mind). Three investors decided to invest 1000 USD, 2000 USD and 7000 USD in it respectively.
- First investor funded 1000 USD and he would get an interest equal to 1000 / (total deposit) = 1000 / (10000 + 1000 + 2000 + 7000) = 1000 / 20000 = 5%.
- Second investor funded 2000 USD and he would get an interest equal to 2000 / (total deposit) = 2000 / (10000 + 1000 + 2000 + 7000) = 2000 / 20000 = 10%.
- Third investor funded 7000 USD and he would get an interest equal to 7000 / (total deposit) = 7000 / (10000 + 1000 + 2000 + 7000) = 7000 / 20000 = 35%.
- The interest of the Managing Trader will be equal to 10000 / 20000 = 50%
Consequently, funding his trading account with 10000 USD and getting investment from traders, Managing Trader got the same interest in his account as Investors. All interests are directly proportional to investments of all participants (Managing Trader and Investors) in the total deposit of the account.
If furthermore, new Investor joins them and decides to invest 5000 USD in this account, his interest will be 5000 / (20000 + 5000) = 20%. Shares of other members will also change because of new invested funds, but will not reduce while absolute calculation.