Paper Trading – How to Practice Investing Before Risking Real Money

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

According to the Wall Street Journal. This bout of volatility was part of a month-long stock market crash, caused in part by anticipation of an interest rate hike by the Federal Reserve.

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

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

If you don’t know how to get started as an investor and want to learn the ropes before investing your money, paper trading can be a way to build confidence before risking your first dollar.

But don’t get so caught up in fantasy trading that you forget to start investing for real. Ultimately, the best way to create wealth by investing is not to use special tricks or fancy tools, but to invest in a diversified portfolio of index funds and let time in the market do its thing. work. Here’s what you need to know.

What is paper trading?

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

“Paper trading allows you to make choices and then follow the market performance of those choices to see how things play out,” Johnson says. “You can try different strategies or even choose different companies and get an idea of ​​their potential performance,” 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 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 under real market conditions.

Why should you practice investing?

When you’re not quite sure if you’re ready to invest, or if you don’t think you know enough, trading on paper can give you some confidence before you start using your own money, says Matthews. Moreover, you can try out new strategies and ideas in advance, before committing real money.

“For me, trading on paper was very helpful in seeing how things are going and how the market works. It really helped me develop a realistic view of the stock market and the kinds of returns I would get,” says Matthews.

While paper trading is a great way to understand the intricacies of the stock market for those who are curious, it’s important to remember that you don’t need 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 trading on paper can also help you get used to using an investment platform. When you buy and sell stocks, there is a learning curve. A demo account or a stock simulator can help you get familiar with the stock research process and place different types of orders.

When you’re ready to start investing, you’ll know how the process works and you’ll have more confidence in your ability to make decisions for your portfolio. Trading on paper 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 a few pitfalls to avoid.

“You can learn a lot from trading on paper, but it’s important to know that it’s not exactly the same as trading in real life,” Johnson says. “Sometimes you do well in the action simulator, but in real life it doesn’t go as you expected,” he explains.

Additionally, many trading apps and platforms use terms like “investment game” to advertise themselves. Paper trading accounts and demo accounts can feel like a game, and you could be taking greater risks than you otherwise would, 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. “You can take big risks and make bad choices with a demo account and not suffer the consequences. You can’t treat your real money that way,” he adds.

Another problem with paper trading accounts, Matthews points out, is that it’s not real. You may feel satisfied with your performance with your stock simulator, but you are not actually making money or building wealth for the future.

“If you’re doing well in the paper trade, it’s not your money,” says Matthews. “You’re like, ‘I could have made that 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 start investing for real.

Best Paper Trading Platforms

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

paperMoney by TD Ameritrade

Part of the thinkorswim platform and 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 a feel for how to pick stocks and make trades can be a good way to familiarize yourself with the use of an advanced platform. And, once you’re ready to take the real action, TD Ameritrade ranks among NextAdvisor’s top picks for the best online stock brokers.

Although TD Ameritrade offers most major investment classes, the brokerage does not offer access to cryptocurrencies or fractional shares.

E*COMMERCE

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

As well as offering a demo account, E*TRADE also offers a range of predefined portfolios, so you can ask professionals to help you get started. For some investors, it may make sense to start with pre-built portfolios and practice investing, then upgrade to the more advanced platform after building confidence.

eToro

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

Besides providing access to around 20 cryptocurrency choices, eToro also has a social trading feature that allows you to learn and copy trades from professional traders.

How does the market.com work?

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

You can experiment with a simulated portfolio or learn the basics of investing with the collection of educational resources on the site. You can even enter contests and see how your hypothetical portfolio compares to that of other potential investors. However, it’s important to note that you’re not really investing, so eventually you’ll want to move to a brokerage and start building a real portfolio.

How to start investing for real

Johnson recommends new investors start with index funds and ETFs. Even if you use a stock simulator to find new ideas or try out different strategies, you can start with index products so you can start building wealth without waiting to learn how to choose individual stocks.

“You don’t have to worry about picking the wrong stock or what happens if a company crashes 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.”

That doesn’t mean you should start day trading, though. Even once you start investing in individual stocks, Johnson cautions against frequent trading. Instead, he suggests learning about what makes a good long-term stock and picking companies that are likely to stay put and generate gains over time.

Matthews suggests using a calendar with your paper trading account and creating a time frame to move into real investing, such as starting to invest after a month or quarter. He recommends using no more than a quarter with a demo account before you start investing.

“As long as you have a strong savings account and a separate emergency fund, get started. I don’t care if you have five dollars or a hundred dollars, invest it,” Matthews says. “Be consistent with that. If you have ten dollars a week, start with that. Then you can increase according to your situation. Make that progress, no matter how small, and then build from there.

About Nicole Harmon

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