What Is Paper Trading?
If you’re new to investing, you may be a little nervous about putting your hard-earned money on the line. That’s where paper trading comes in. What is paper trading? Paper trading is the practice of buying or selling stocks, options, ETFs, bonds, derivatives or other financial instruments in a “practice” or simulated environment. It is a great way to get your feet wet making trades, without actually placing them in the live market.
Paper trading looks much different now than it did when the term originated. Before the days of simulated trading platforms and even before the internet was widely adopted, would-be investors kept practice records of their trades on paper. They then monitored the real market performance of their investments to keep track of their wins and losses.
How To Start Paper Trading?
Step 1: Decide what you want to trade. As stated earlier, this can be any number of investment products. For the sake of simplicity, we recommend starting with stocks.
Step 2: Next, write down on paper how much “practice” money you’ll be investing. This doesn’t have to be the amount you’d actually consider investing in the stock market. However, you should remember this exercise is a dry run for actual trading. So you may want to use a number that closely resembles your anticipated investment.
Step 3: Pick a handful of stocks to paper trade. When you start trading for real, you will likely have a much larger and diversified portfolio of stocks. But for now, pick a number that you can keep track of. Write down the names of the stocks and the current price at which they are trading.
Step 4: Monitor your paper investments over the course of at least a month or so. Throughout this time you should decide whether to buy, hold or sell your paper trading investments.
This process will help you build confidence to either further your simulated trading exercises, or move on to an actual brokerage account. There is, however, one very important note for your consideration. If you’ve ever heard the phrase “that looks good on paper”, you know not everything when written down is the same when put into application.
While writing down your trades on paper can be very effective, there are better alternatives available. Paper trading apps and platforms are much more accurate simulations of live trading. This is because they account for factors such as fees, stop-losses, limit-orders and other nuanced aspects of trading. Many simulation trading apps even tell you when to buy and sell.
What is the Best Paper Trading App?
There are quite a large number of stock simulation platforms out there. Additionally, many online brokers now have a paper trading or simulated section of their platform. This feature acts as a gateway for inexperienced investors, and many times is the exact same user experience as their live trading section. Here are a few of the best paper trading apps for your consideration.
Investopedia Stock Simulator
Even though this platform is called “Investopedia Stock Simulator“, you can also invest in options. However, if this is your first time using a platform like this, it might make sense to stick with stocks. You’ll receive $100,000 in “virtual cash” to put your trading skills to the test. Additionally, you’ll get to interact with over 700,000 investors from around the world while learning the ropes.
Marketwatch Virtual Stock Exchange
Another gamified platform that has picked up steam over the years is the Marketwatch Virtual Stock Exchange. Equipped with instruction guides and course materials, this game is not only effective for aspiring investors, but also can be used by teachers or professors in the classroom. Once you create an account, you can buy and sell stocks using your virtual portfolio. Paper trade with friends, coworkers or even join one of the tens of thousands of games already in progress.
WeBull Paper Trading Competition
If you’re interested in a simulated trading experience that is connected to your brokerage app, Webull has a Paper Trading Competition that could be a great option. You’ll start out with a $10,000 virtual cash balance at the beginning of each round. Keep in mind that you do have to be a U.S. account holder with a funded Webull brokerage account to be eligible. But, if you are considering Webull as a brokerage platform, you should check out our Webull review.
What Is Paper Trading? Final Thoughts
Paper trading can be a valuable first step in your journey towards financial freedom. In order to get there, you need to understand the wealth building tools you have available to you. Paper trading simulations provide an important learning experience. Understanding how to buy and sell investment products is one of the most valuable wealth building skills one can have.
What is paper trading? A no risk, first step towards a brighter future. To learn more about paper trading and other practical investment tips, sign up for our free Investment U e-letter today!