Paper Trading — Practice Investing Before Risking Real Money

Given the recent ups and downs of the stock market, it is easy for new investors to feel intimidated. But there is a free way to get some practice – through paper trading, otherwise known as a stock market simulator.

The Dow Jones Industrial Average, one of the three major stock market indices, fell more than 1,100 points on Jan. 24, before rallying sharply in the afternoon, closing the day with a gain of 99.13 points. to the Wall Street Journal. This one attack of volatility was part of a months-long stock market slump, triggered in part by anticipation of the Federal Reserve’s rate hike.

If you don’t understand what’s going on and are nervous about putting real money on the line, you can use paper trading to get a sense of how investing works and what’s happening in the stock market.

“I started with a stock simulator when I learned to invest,” says Kevin Matthews II, a former investment advisor and the author of “Starting Point: How to Build Lasting Wealth.” “I started with $100,000 and picked several stocks. After a few months, I could see how I was doing,” he says.

If you’re not sure how to get started as an investor, and want to learn the ropes before putting in your money, paper trading can be a way to build confidence before risking your first dollar.

But don’t get so caught up in imaginary trading that you forget to actually invest. Ultimately, the best way to build wealth from investing is not through special tricks or fancy tools, but rather by investing in a diversified portfolio of index funds and letting the time in the market do the work. Here’s what you need to know.

What is paper trading?

Paper trading is a way to simulate returns in the stock market without actually buying or selling investments. Some brokers offer demo accounts, says: Stacy JohnsonCPA, a former stockbroker and the host of the Money! podcast. They offer you a dollar amount that you can practice with, place “trades” on the platform and then see how your choices would have performed in the real market.

“With paper trading, you can make choices and then monitor the market performance of those choices to see how things pan out,” Johnson says. “You can try out different strategies or even choose different companies and get an idea of ​​how they might perform,” he explains.

In other words, you can think of paper trading as the stock market equivalent of a fantasy football league. You don’t put any real money into it and you don’t actually own the investments in your paper trading portfolio, but you can see how this hypothetical portfolio would perform in real market conditions.

Why should you practice investing?

If you’re not quite sure you’re ready to invest, or if you feel like you don’t know enough, paper trading can give you a degree of confidence before using your own money, explains Matthews. Plus, you can try out new strategies and ideas ahead of time – before committing any real money.

“For me, paper trading was very helpful to see how things move and how the market works. It really helped me get a realistic view of the stock market and what kind of returns I would get,” says Matthews.

While paper trading is a great way to understand the intricacies of the stock market for the curious, it’s important to remember that you don’t have to try to time the market or pick specific stocks to start investing. Experts recommend buying and holding a diversified portfolio of index funds and exchange-traded funds (ETFs), which are inexpensive, low-risk and allow you to easily invest in many different stocks at once.

Johnson says paper trading can also help you get used to using an investment platform. When you buy and sell stocks, there is a learning curve involved. A demo account or stock simulator can help you familiarize yourself with the process of searching for stocks and placing different types of orders.

When you’re ready to start investing, you’ll know how the process works and feel more confident in your ability to make decisions for your portfolio. Paper trading can help you get used to the idea of ​​investing and eventually take the plunge and start investing for real.

Disadvantages of Paper Trading

While you can use paper trading to practice stock investing, there are some pitfalls to watch out for.

“You can learn a lot from paper trading, but it’s important to know that it’s not exactly the same as real-life trading,” Johnson says. “Sometimes you do well in the stock simulator, but in real life things don’t work out as you expected,” he explains.

In addition, many apps and trading platforms use terms like “investing game” to advertise themselves. Paper trading accounts and demo accounts can feel like a game, and you can take greater risks than you would otherwise, Johnson warns.

“With a demo account, it feels like a game, and once you start using real money, it’s not a game anymore,” Johnson says. “With a demo account you can take big risks and make wrong choices without suffering the consequences. That’s not how you handle your real money,” he adds.

Another problem with paper trading accounts, Matthews says, is that it’s not real. You may feel good about how well you are performing with your stock simulator, but you are not actually making money or building wealth for the future.

“If you do well in the paper business, it’s not your money,” Matthews says. “You’re like, ‘I could have made so much money,’ but it wasn’t real, so you didn’t.”

Don’t get so caught up in your fake performance that you forget to actually invest.

Best Paper Trading Platforms

Some brokers offer demo accounts and stock simulators so you can practice investing before using your own money. Here are some of the best paper trading platforms to help you learn the basics without risking your money.

paperMoney by TD Ameritrade

Portion of the thinkers swimming platform and a suite of investment tools from TD Ameritrade, paperMoney can help you learn how to find stocks and execute trades. TD Ameritrade offers one of the most robust investment platforms, so using their stock simulator to get an idea of ​​how to pick stocks and make trades can be a great way to familiarize yourself with using an advanced platform . And once you’re ready to move into real stocks, TD Ameritrade is one of NextAdvisor’s top picks for the best online stock brokers.

While TD Ameritrade offers most of the major investment classes, the brokerage does not provide access to cryptocurrencies or fractional shares of stocks.

E*TRADE

E*TRADE offers paper trading through its Power E*TRADE platform, which also includes other tools aimed at advanced investors. All customers with an E*TRADE account have free access to these tools.

In addition to offering a demo account, E*TRADE also has a range of ready-made portfolios so you can get professional help getting started. For some investors, it may make sense to get started with ready-made portfolios and practice investing, then move to the more advanced platform after building trust.

eToro

eToro offers a “virtual wallet” that you can practice while learning the basics of investing in cryptocurrencies. At the time of writing, eToro is only available for cryptocurrency trading in the United States, although investors in other countries have been able to access other assets, including stocks and forex trading, since 2007.

In addition to providing access to about 20 cryptocurrency choices, eToro also has a social trading feature that allows you to learn from and copy the trades of professional traders.

Howthemarketworks.com

Unlike the other paper trading platforms, which are all associated with online brokers that offer real investing, this free simulator is solely for paper trading.

You can experiment with a simulated portfolio or learn the basics of investing by collecting teaching aids on the website. You can even enter competitions and see how your hypothetical portfolio compares to that of other potential investors. However, it is important to note that you are not really investing, so eventually you will want to switch to a brokerage and start creating a real portfolio.

How to start real investing

Johnson advises new investors to start with index funds and ETFs. Even if you use a stock simulator to find new ideas or try different strategies, you can get started with index products so you can start building wealth without waiting to learn more about choosing individual stocks. shares.

“You don’t have to worry about picking the wrong stocks or what happens if a company shuts down when you use index funds or ETFs,” Johnson says. “As you learn more about investing, you may be able to pick individual stocks and make a profit.”

However, that doesn’t mean you should start day trading. Even once you start investing in individual stocks, Johnson warns against frequent trading. Instead, he suggests learning what a good long-term stock is and choosing companies that are likely to have lasting strength and pay profits over time.

Matthews suggests using a schedule with your paper trading account and setting a deadline for switching to real investing, such as starting investing after a month or a quarter. He recommends going no more than a quarter with a demo account before actually investing.

“As long as you have a solid savings account, and you have a separate emergency fund, get started. I don’t care if you have five dollars or a hundred dollars, invest it,” says Matthews. “Be consistent in it. If you have ten dollars a week, start with that. Then you can increase according to your situation. Make that progress, however small, and build from there.”