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This post was written by Jeff Fang and originally appeared on Wealth of Geeks. Jeff is a current Harvard student and author of the blog Financial Pupil. He’s passionate about learning, living, and sharing all things personal finance-related.
Paper trading is one of the best ways to learn about investing without risking any of your money.
Have you always wanted to start investing but are too scared to lose your money? Maybe you can’t afford to withstand any significant losses or don’t know anything about the stock market yet. What if there were an easy way for you to practice trading stocks without putting any real money on the line?
Well, lucky for you, there is! It’s called paper trading, and it can seriously help you understand the markets. This post will cover everything there is to know about paper trading. From the different trading accounts to the pros and cons of paper trading to how you can open your paper trading account today, you’ll have a thorough understanding of paper trading by the end of this post. Let’s dive right in.
What is Paper Trading?
A paper trade is simply a simulated trade that allows you to buy and sell stocks (without risking money). The reason it’s called a “paper trade” is that back in the day before computers, aspiring investors would write their trades out on paper to practice before risking it in the real stock market. The purpose of this was to test strategies and hypotheses about the stock market without losing any capital.
You might be thinking to yourself, “well, I sure don’t want to write out my trades manually on paper just to learn… that’s too much of a hassle.” Don’t worry. Nowadays, paper trading occurs on electronic stock market simulators, which feel just like real trading platforms.
In other words, paper trades let you trade with “fake” money to practice buying and selling securities. Usually (if you pick a good trading software), the stock prices will be updated in real-time, so you’ll get as close of an experience to actual stock market trading as possible.
Pros and Cons of Paper Trading
Paper trading provides a great way to gain exposure to the stock market, but as with everything, there are advantages and disadvantages. Here are some of the pros and cons of paper trading:
Pros
Risk Zero Money
The biggest pro of paper trading is that you risk zero money! If you wanted to buy a thousand shares of Apple in real life, you’d need to spend over $100,000 (as of now)!!! You can try it out with practice trading to see what happens and risk no money. Plus, if you accidentally misclick and place a trade, you didn’t mean to. No worries, because all the money in your paper trading account is virtual! You can invest stress-free thanks to paper trading.
Test Out New Trading Strategies
Going along a similar vein as the first pro, you can try new trading strategies risk-free because you don’t risk any money. Maybe you think you found a way to do futures trading effectively. Or perhaps you saw some crazy arbitrage play you think might work. Whatever the case, you can test out your strategy in a paper trading environment before going out and risking anything. That will build your confidence in your trading strategies and let you know whether they have a shot at working.
Get Familiar with Your Trading Platform
Another boon is that when you paper trade, you learn the ins and outs of your brokerage account. This way, when you put money on the line, you’ll be a pro with the software. Knowing what you’re doing will provide you with a considerable advantage come time for you to start investing.
Cons
No Emotional Stakes
Warren Buffet once said, “The greatest enemies of the equity investor are expenses and emotions.” A huge part of succeeding in the stock market is how well you control your emotions. When you paper trade, you don’t need to worry about the emotional side of things. No risk does mean no stress. But no stress also means you won’t experience what it’s like to buy and sell stocks. There’s a big difference between losing $10,000 in fake money on a paper trading account and losing $10,000 in your real investing account.
Missing Out on Profits
When you paper trade, you can’t make money. You’re using fake money to trade, so there’s no downside, but there’s also no upside. Let’s say you make a fantastic trade that brings you over 100% gains on your position. You might feel happy that your trading strategy worked but also sad that you didn’t put any real money on the line.
Not Perfect for Simulating Actual Conditions
Even though they are designed to be simulators, many trading accounts aren’t perfect replicas of the actual investing experience. For one, some trading accounts provide delayed stock price information which could give you an unrealistic advantage. Another thing to consider is commission and slippage. When you trade stocks in real life, there’s going to be commission (a price you need to pay) on every trade and potentially minimum rates or fees with your broker. Paper trading accounts might not build these functionalities into their trading system.
Why You Should Consider Opening a Paper Trading Account
A lot of new investors will read about paper trading and laugh at it. “Why bother trading if you’re not going to make any money?” That is the wrong approach.
Regardless of the cons of practicing trading, it’s still a fantastic way to get your feet wet and help you learn the ropes of investing. Trading and investing can be overwhelming, and it never hurts to practice a bit before diving in. It’s like golf: professional players play practice rounds all the time. Does it actually “count” for anything? No. But it DOES make them better players all around.
Also, when you’re a newbie to the stock market, you could potentially lose—and lose A LOT. You don’t want to become one of those stock market horror stories that people point at as a reason not to invest. (Look at uncle John; he went all-in on penny stocks and meme stocks and lost it all!) Getting some practice trading experience means that hopefully, you’ll make all your mistakes with fake cash.
Even if you’re an experienced investor, paper trading could still benefit you. The stock market is constantly changing and evolving. That means that strategies that worked yesterday might not work today, and new trading styles emerge by the minute. Virtual trading accounts let you experiment with new setups and trading styles before implementing them for real.
How to Open a Paper Trading Account
Once you’ve decided on starting to paper trade, opening an account is relatively easy. You can do one of 2 things:
- Research new trading platforms/brokerages which you can open an account with
- If you already invest, see if your brokerage offers any paper or practice trading accounts.
Typically, because it’s fake money, sites will require some basic information for you to set up a paper trading account. Something to note is that some sites will make you pay for paper trading. If you run across one of these, try to look for something else. There are too many free paper trading platforms that work for you to be paying for it.
There are also two different kinds of paper trading platforms you’ll run into. One type is going to be stock market simulators. These typically track the real stock market and let you buy/sell stocks (or index ETFs) that exist. Good stock market simulators will have current prices, but some might have 15-20 minute delays. The second type is going to be fantasy simulators. These are like fantasy sports in that they don’t track any actual index. Their movements are random, and it’s almost like you’re investing in an alien stock market. These simulators are like fantasy trading games and typically charge a bit to use them.
Some Paper Trading Platforms to Check Out
If you decide to paper trade, here are some popular trading platforms you might want to check out.
TD Ameritrade
Thinkorswim by TD Ameritrade is arguably the most sophisticated paper trading platform out there. You can sign up with just an email address and access tons of advanced tools like customizable stock charts, strategy testers, and stock scanners. I highly recommend Thinkorswim for beginner investors to check out.
Webull
Webull’s practice trading account is a powerful and intuitive way for new investors to learn the stock market. All you have to do is open up a Webull account, and you get a paper trading account for free on any device (phone, tablet, computer).
E*TRADE
E*TRADE gives every full user access to their virtual trading service. With E*TRADE, you can see what effect the trade will have on your account before placing an order. Also, this platform allows you to paper trade stocks and options, so you can try out some more advanced trading strategies if you’d like.
MarketWatch
MarketWatch’s Virtual Stock Exchange lets you virtually buy and sell stocks in real-time with fake money. Something powerful about this simulator is that all trades are in real-time and reflect actual market conditions. Also, MarketWatch provides a leaderboard of who is succeeding the most in their paper trades, which could motivate you to learn more and get better at investing.
TradeStation
TradeStation is another online brokerage that offers a virtual trading account in the app. Something unique about TradeStation is that you can test out automated trading. TradeStation allows you to try out automation strategies before risking any real money on them.
Final Paper Trading Tips
Before diving headfirst into paper trading, here are a few final tips that could you along in your journey.
1. Keep in Mind That Paper Trading and Actual Trading Are Not the Same
Remember that the psychology of trading with no consequences and trading with your own money is drastically different. Chatting with a friend during a coffee chat and talking to an employer for a job are not the same. When you finally transition to trading for real, be sure to start in small amounts and work your way up.
2. Try to Be Realistic with Your Paper Trading
It’s easy to succeed when you can add zeros to your balance at ease and erase previous trades. Easy success, however, won’t help you learn. Try to keep your balance in the paper trading account similar to the amount of real money you have on hand, and don’t wipe your previous trades if you make mistakes.
3. Analyze Your Success (and Failures)
Nobody ever learned anything from winning. When it comes to trading stocks, the same rule applies. Record and track your results in your paper trading account so that you can look back and see where you succeeded or failed. That will help you learn and get better as an investor.
Start Learning How to Invest!
Whether you make five figures or millions, if you’ve been looking for a way to learn how to invest without risking anything, paper trading is perfect for you.
With paper trades, you have the opportunity to make trades on real stocks in real-time, but with virtual currency. That allows you to learn from the stock market without having to pay the price of failure.
Some Pros of Paper Trading
- You risk zero money
- You can test out new trading strategies
- You get a chance to familiarize yourself with your trading platform
Some Potential Cons of Paper Trading
- There are no emotional stakes, so it’s not a perfect replica of the stock market.
- You might miss out on profits.
- Some paper trading software doesn’t account for commission, slippage, and current market conditions.
It’s impossible to get good at something without practice. And paper trading is a great way to practice investing. So if you’re an aspiring investor, what are you waiting for? Get out there and start paper trading!
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David @ Filled With Money
August 25, 2021 at 4:45 pmPaper trading is a great way to dip your toes into investing. However, I very highly disliked the lack of real time information that paper trading didn’t provide so I also went with real investing quite shortly after that.
There really is no emotional investment so real investing is the best way. However, it’s still not a bad way to teach a high schooler or a middle schooler the ins and outs of investing.
Chrissy
August 30, 2021 at 12:13 amHi David—sorry I missed this comment! I haven’t done much paper trading myself, and didn’t realize you don’t get real-time info. How annoying!
Yes, you’re right that real investing is the best way to truly learn. But I also agree that it’s a great place for kids and teens (or newbie adults) to get started and practice the mechanics of investing.