Paper Trading: Seven Benefits To Practicing Buying Stocks
Scared to pull the trigger on that first stock purchase? Looking for a way to start practicing before you put your actual, hard-earned money on the line? Buying stocks by paper trading might be one of the best ways to start learning how the process works. It also gives you a means to practice your methods of picking stocks to buy before actually putting the real money in. Let’s check out the 10 ways to practice buying stocks by paper trading.
Paper Trading Definition:
According to Investopedia.
“A paper trade refers to using simulated trading to practice buying and selling securities without actual money being involved.”
Pretty simple huh?
Paper trading can be done pretty simply by using a spreadsheet and some simple formulas. All that is needed is the time to enter the tickers, prices and any changes that occur. Whether you initiate a position change, via a buy or sell. Or a stop-loss.
A much easier and better way to go is to utilize the many different platforms that are out there to allow you to do this electronically. The many different apps that enable you to do this type of trading are amazing.
Let’s talk a little bit about them.
Benefit number 1: Online trading platforms
The explosion of online trading platforms has made it easy to practice paper trading without actually committing real money.
Let’s talk about some of the ones out there that I use:
Stock Wars: This was my first foray into paper trading. This app starts you with a $100,000 account. You can buy and trade any stock or bond that is available on the market.
Some cool features:
- Shows date and purchase amount so you can track your progress
- Dividends are calculated and added to cash account
- Gives you a cost basis of your purchases
- You can access all relevant technical information on any stock you are tracking
- You can see how you do against other traders
- Any stock/bond/mutual fund/ETF in the investing universe is available to trade
- Gives you the numbers on your performance for the current month and year
And the best part is that is that it is free!
Stockfuse: Another app that allows you to buy and trade any stock in the universe. It gives you a $200,000 account to begin trading with.
Also, tracks your portfolio for the day and gives you a P&L for the day. Plus it shows your cash position and account value.
Some cool features:
- Each trade shows your share count, entry cost and current price of your purchase
- Gives you a current value of each position
- Shows a P&L for each trade as of purchase
- Gives you a daily performance of each position
- Displays a percentage up or down for each position daily
- Allows you to be able to do a quick trade doing either buy more, sell or close your position
- Quick looks at current technicals on each position
Again free! Also, allows you to track your progress against other investors.
Investopedia Stock Simulator: This is a newer addition for me, as I have been using the others for a while now. Investopedia is a phenomenal resource and I was pleased to see they started offering a stock trading simulator.
They have some great tutorials on how to play their game. It has some cool features as well:
- Portfolio page to be able to manage all of your portfolios
- Shows all the relevant information on your current portfolio
- Purchase price
- Current price
- Total value of all of your holdings
- Today’s change of each position in your portfolio
- Total Gains/Losses for each position
- Shows all the relevant information on your current portfolio
- Buying stocks gives you a real world feel as it displays the same options your broker would when you purchase a stock
- Stock symbol
- Purchase quantity
- Price
- Market
- Limit $
- Stop $
- Duration
- Send email to confirm trade
- Gives you a listing of the top five movers and shakers on a daily basis
All in all this simulator gives you the feel of working with your real-world broker. I use TradeKing for all of my trades and this is very similar to their platform so it feels very familiar to me.
There are numerous other great simulators out there to practice your trading skills.
The ones that I came across the most frequently were:
- Scottrade
- TD Ameritrade
- Optionshouse
- Charles Schwab
Quite a few online brokerages offer paper trading or simulators as a tool to help train their clients. It is a great value add to beginners as it gives them the feel of buying and selling. Without actually putting their hard-earned cash at risk.
Benefit number 2: Learning to invest without any risk
This is probably the greatest advantage to paper-trading there is. Let’s face it when you are just starting out in anything that we try. We are going to be nervous, unsure of ourselves.
This platform allows you the ability to practice making trades without any actual “skin in the game.” This mere fact alone can make give you the confidence to learn without the fear of failure.
One of the mental roadblocks involved in getting started in investing is the fear of losing money. I am not going to tell you that if you practice enough that you will never lose money. That is a lie, even the best investors make mistakes and lose money.
But that is no reason not to start. This platform gives you the ability to try without that fear holding you back. Because there is no actual money involved you can experiment without worrying about losing money.
You can explore different avenues of investing and see which fits you the best. The platforms allow you to track your progress. And it gives you the ability to see how you are performing relative to other investors, as a gauge.
Benefit number 3: Learn as you go
When you first sign up for a trading account. There will be different terminology that you will encounter that may be confusing. It can be a little overwhelming at first. This can lead to paralysis and make you hesitate to pull the trigger on that actual first trade.
The first time you buy a stock will be a nerve racking time. It doesn’t need to be, and simulators can help you learn the process so that it takes away that fear.
Terms like limit orders, market orders, stop-loss limits, quantity, and the price will pop up when you place that first order. Most simulators will give you the same feel as a brokerage. This will allow the chance to learn what these terms mean.
Most simulators will have help or guidance that relates to these terms. Once you take the time to learn what they mean, as it pertains to your trades. It will give you the confidence that your know what you are doing when you place that first trade.
Let’s give you an example from my first trade. After I opened my first account and waited the required time for the funds to post to my account. It was finally the moment that I could place my first trade.
Nothing in reading about how to buy my first stock did it explain what the different terms meant that I would encounter. So, when I pulled up the first trade it asked me how many shares. Easy. Next was whether I wanted to execute the trade at market price, stop-loss, or limit-order. Well, I had exactly no idea what any of those meant. So I had to stop and go back and explore the different meanings. By the time I came back to place the order my session had logged out.
The next emotion that came over me was hesitation. I felt like I had no idea what I was doing, so I decided to hold off until I learned more. It took me almost a week of reading, talking to other people and just plain old procrastination. Until I logged back in and placed my first order.
If I had discovered stock trading simulators before this I could have pushed past this fear on that first trade. Practicing would have given me the confidence that I lacked.
Benefit number 4: No stress
Utilizing simulators to learn removes two of the biggest emotions that can cloud your decisions when investing. They would be fear and greed.
Fear of missing out is one of the biggest motivators in life. We all want what is the “hot new thing” because we don’t want to miss out in the event that they run out. Or that we miss out because of a lack of money or circumstances. Fear of the not making money when we had the chance can be a powerful emotion when investing. Or the fear of missing out on that one big trade that could make us wealthy.
Greed is the next biggest emotion we deal with when investing. Humans are a greedy bunch, we all want more. More money, more power, more stuff and on and on.
Simulators help eliminate both of these emotions from your trading. Because you have no fear of missing out or greed involved. It allows you to focus on the process of valuing a company. Not the pitfalls that can come from emotions clouding your judgment.
Benefit number 5: Confidence
The confidence you gain from utilizing simulators can be invaluable. As a beginner, you may approach investing with a little uncertainty. Nothing can help build your confidence in your investing ability like executing trades and seeing the potential monetary gains from your trades.
These boosts can go a long way towards your ultimate success as an investor. As a result of your gaining knowledge and experience using a simulator. You will feel less stress and much more confident in your decisions. Because you have actually seen them work, in real-life.
One of the benefits of these simulators on your confidence is the ability to see the results of your decisions first hand. When you execute a difficult decision based on complex information, and it works out well.
Then the sky’s the limit.
Benefit number 6: Ability to make mistakes
One of the greatest learning tools we all have in live is the ability to learn from our mistakes. From learning that the candle flame is hot and burns to not asking a woman her age. We all learn from our mistakes and grow from them.
Paper-trading gives you that same ability. To learn from your mistakes without losing actual money. This can sometimes be the biggest benefit of all. As we mentioned before every investor makes mistakes. It is our ability to learn from those mistakes that will lead us to our greatest achievements.
With simulators, you can experiment with different strategies without the fear of losing all of your money. It also allows you to track those strategies and see what works and what doesn’t work. This can be an invaluable experience.
As you learn from your mistakes and change your strategies you can gather more evidence. Then if you find it is not working you can pivot again. Using a simulator allows you to do this without any of the drags of our emotions weighing us down.
Again, priceless.
Benefit number 7: Ability to test different strategies
This was my personal draw to investigating paper-trading. As I discovered different strategies I wanted to test them out for myself. I could have put pen to paper and done it that way, but that seemed so laborious to me.
So when I discovered the different simulators out there I was extremely excited, to say the least.
With all of the different investing strategies out there it can be a bit overwhelming deciding which one is best. For me and my personality. As well as financially.
Momentum, growth, value, options, foreign, commodities, bonds, and mutual funds. So many choices. All have their pluses and minuses and the simulators give you the opportunity to explore all of them with no risk to you.
The two strategies that drew me to explore simulators where dividend investing and the “Magic Formula”. I discovered both of these as I was reading and learning.
With the simulators, I have been able to conduct my own experiments. Basing these on my own data has helped me learn more about these different strategies. And to decide if they would work for me.
Much of investing is mental. And finding a strategy that fits you is almost as important as the stocks you choose to invest in. Using the different simulators has allowed me the chance to explore both of these ideas and see how the function.
Having the data that I can see on a regular basis gives me the chance to decided if I like these ideas and want to continue to explore them more. Or if it is a waste of time and possibly money.
The great thing is that the ideas are all laid out in the black and white. There is no arguing with the results, and if they are not what you want. You can either stop altogether or change your path to try to find a different way.
By the way, I have discovered that both ideas work extremely well and I have started to incorporate them into my investing activities.
Final Thoughts
Paper trading or using simulators can benefit new investors or experienced investors with the ability to experiment without the risk of losing money.
They can explore all the aspects of investing. From the opening of your first account, making the first trade, and all the technical analysis that is required to become a great investor.
It allows you the chance to explore all the different strategies out there without the emotions that can so often cloud our thinking. It gives you the opportunity to dig deep into the process and steps you need to go through to learn anything that is difficult. Without the drag of emotions holding you back.
It doesn’t help you eliminate emotions when you actually starting using real money. Only real experience will do that.
But it will give you the chance to learn the technical side so that you can focus on your emotions, instead of the tech stuff.
Every beginner should open a paper-trading account or simulator so that they can the valuable experience needed to become a great investor. All without risking actual capital.
This experience will paper amazing dividends over time. It will also shorten the learning curve to becoming a successful investor. As you gain financially from investing from this process you will continue down that path.
As opposed to someone who tries buying one stock or making a larger investment only to see it fail. That failure will most likely lead to that person not continuing or to pass on the opportunity.
I have personally gained quite a bit from paper-trading. As I mentioned earlier it has allowed me to test different ideas. And to see the results first hand has been invaluable. Testing these ideas and seeing the results has lead me to incorporate them into my investing strategies.
Both ideas have been fruitful for me, and I have gained more confidence in my decision-making.
These are some of the benefits that I have personally gained from paper-trading.
I highly recommend you give it a try.
Note: This article was contributed to ValueWalk.com by IntrinsicValueFormula.
Category: Trading Penny Stocks
