Trading has become advanced and provided other means of making an income beyond the traditional methods of solely learning the craft as either a side hustle or a more permanent career.
There is another industry geared towards passively investing in the markets through leveraging off the skills of other more accomplished traders. Two of the popular methods for achieving this are PAMM and copy trading.
These are forms of managed accounts involving the replication of positions from an experienced manager to the accounts of those subscribed to them. This is where they are quite similar, and the goals of which are the same.
However, the similarity is so high it is sometimes difficult to distinguish the two. Some slight differences exist between both, which this article will delve into, along with which could be the better choice.
What is PAMM?
The PAMM or Percentage Allocation Management Module is a popular managed account. It involves selecting a designated ‘money manager’ via a broker where their positions are automatically copied onto the investor’s platform.
This individual will have provided a track record of their results, and the investor has a choice over many different managers. One accepts any losses or profits gained from them. The investor typically invests in an already established pool involving others with different contributions above a prescribed minimum.
As the name suggests, PAMM uses a percentage allocation for the profit distribution depending on the number of people in the fund. For instance, if there are four people in a pool, each person should receive 25% of the profits minus any commissions owed to the manager. These fees will vary from trader to trader.
What is copy trading?
Copy trading falls under the umbrella term of ‘social trading,’ merely meaning a social network where investors interact with different money managers they’ve invested in, learn how they make trading decisions, and watch their trades in real-time.
All the people being copied will show their performance over time, a brief description of their strategy, and crucial statistical data.
Like PAMM, copy trading involves the same process of a platform automatically copying one experienced trader’s positions onto another less experienced one. Commission typically applies to closed deals, regardless of whether they were in profit or not.
The main differences between PAMM and copy trading
PAMM and copy trading accounts are pretty similar as both are meant to be passive investments. They both involve investors who don’t desire to learn trading or are simply looking to diversify their portfolios.
Therefore, they will allocate spare money to chosen knowledgeable traders with a proven profitable track record and leverage their skills to earn income. Each will also entail some accessible platform allowing for simple investing where investors can track how their investment is regularly doing.
It can be a little tricky to draw the line between the two types of accounts. PAMM has existed for a lot longer, with copy trading only really becoming increasingly popular over the last few years.
Ultimately, the objectives of both accounts are the same; it is how they go about achieving it that is distinct. It boils down to two key differences; the control investors have with their accounts and the allocation of profit:
- PAMM is more of a pooled account where investors primarily invest for defined trading periods (at least a month) without much control; in copy trading, it is much simpler and quicker to withdraw one’s investment. Therefore, they have more control.
Although in copy trading, one can invest for however long they desire and observe how many others have invested with a specific trader, any of them can withdraw with no penalty.
In PAMM, each person in the pool has agreed to the same terms and conditions, and withdrawing typically results in some form of early withdrawal penalty. There is far less control with PAMM as investors usually commit to a long-term agreement.
With copy trading, it isn’t long-term, making it easy to leave at any time without any consequence.
- Lastly, PAMM uses a specific percentage allocation depending on the existing pool of funds. So, if there are already four people, a fourth person’s investment means the profit share is now 25%.
With copy trading, the profit share is independent of the person being copied according to their performance. The investor is merely allocating to one trader at a time. While there are also pools for each manager in copy trading, the platform doesn’t calculate the individual investor’s profits off it.
Also, PAMM doesn’t have as much of a social aspect as copy trading. Furthermore, spreads on the latter can be higher than on the former.
In both instances, even more important is ensuring that one chooses the best manager they fully trust with their investment and practicing patience enough to realize their actual performance. This is quite difficult, more so if the investor has little or no knowledge of how the markets work and what the various metrics mean.
With any form of a managed account, this will always be a challenge if one is not trading their own money. Also, either approach is not wholly devoid of some financial risk, and past results can never guarantee future performance.
Nonetheless, the model of PAMM leans more towards a longer-term investment of at least three months due to the limited control and that commissions from the money manager can be higher.
It makes sense for the investor to invest for the long haul hoping that the profits are significant enough to cover the fees. Conversely, copy trading is much more short-term since there is far more leeway.
One can quickly decide not to invest with one trader and move on to another or leave the social network entirely. Commissions do apply to closed positions, which can vary from broker to broker and could affect the worthwhileness of profits somehow.