There’s nothing wrong
with a little friendly investing competition. Especially when none of your
actual money is on the line.
What is paper trading?
Paper trading is a way
for people to learn how to buy and sell stocks without using real money.
Investors use stock market simulators, and the people who generate the highest
stock market returns are technically the “winners.” Except there are no losers here
— the money used isn't real, so there’s no risk. But what’s best about paper
trading is the invaluable experience it provides new investors. Anyone can get
their feet wet in a simulator before diving head first into the real stock
market, where real money is at stake.
Can you make money paper
trading? No, because the money isn't real. But is paper trading a good way to
learn? Absolutely, yes, says, Tela Holcomb, creator of Trade Your 9 to 5, a program that teaches people how to trade and
invest.
“I always recommend
people start with paper trading,” says Holcomb, who's based in Las
Vegas. "We have all of our clients start with it mostly because
everyone who comes to us is brand new to the market and it can be scary."
For example, she says,
if you're the first generation in your family to make enough money to invest,
the fear of losing everything you worked for is real. She says stock
market simulators allow you to start learning the market with "Monopoly
money," which removes some of that fear.
Why use a stock market
simulator?
In the real world,
investors aren’t competing against other players’ returns. “Winning” is about
equaling or exceeding the performance of a benchmark index.
For example, if you’re
picking and choosing individual stocks and after five years your average
returns are less than the returns of the S&P 500, you may be better off investing in a low-cost index
fund that tracks the S&P
500. However, if you manage to beat the index with your stock picks (mind you,
research shows this is unlikely, even among professional investors), you could
say you “outperformed” the stock market.
In the actual stock market,
success isn’t determined over weeks or months, but years.
4 reasons to try a stock
simulator
1.
You’ll
get a general investing education. Many of these platforms offer a very real education in investing,
with a library of articles, tutorials, demos and, at some brokers, the chance
to interact with an online community available to answer technical and
investing questions. "It allows you to learn what to look for when you’re
trading," Holcomb says. You can learn how long you want to hold and when
and how you sell stocks.
2.
It’s
a safe space to learn the mechanics of placing trades and building a portfolio.
There’s a reason student
drivers take the wheel for the first time in abandoned parking lots. The best
place to make all the rookie investing mistakes, such as mistyping ticker symbols or misunderstanding order
types, is wherever you can suffer the least financial damage. Holcomb says
removing that worry that you're going to make a mistake and lose it
all allows you to focus on your strategy.
3.
You
can test drive new investment strategies and types. Looking to expand your investing repertoire?
Trying before you buy is especially important when venturing into new strategies,
such as shorting stocks and trading options, and more sophisticated investing fare such as futures and
commodities and foreign currencies
(forex).
4.
You’ll
learn the importance of keeping emotions out of investing. As billionaire investor Warren Buffett says, one of the keys to being a successful investor
is the ability to control the emotions that lead other investors astray. Even
though investing decisions are less loaded when there’s no real money on the
line, the brain doesn’t always fully absorb that concept — think haunted
houses, roller coaster rides and scary movies. Using a stock market simulator
will provide a preview of what emotions to expect when you encounter the real
market's unavoidable ups and downs. "People will step out there much
more confidently about putting their money to work,” Holcomb says.
Where to find stock
simulators
For a virtual-trading
practice environment that's close to the real thing, you can’t get much better
than the simulated investing platforms offered by actual working online
brokerages.
These practice accounts
typically mirror the broker’s working trading platform.
Most are free, although
they may require you to set up an account. The best brokers give test drivers access to a fully functioning
setup with the same tools that active customers use: watch lists, stock
screens, research and live or slightly delayed data feeds.
What is the best paper
trading site?
Of the online brokers
that NerdWallet has reviewed, the following received 5 stars for their trading
platform functionality and offer paper trading accounts. We've excluded paper
trading accounts that are only a part of a limited demo version of the product.
Note that some of the brokers below may require opening and funding an account
before gaining access to the paper trading account.
·
E*TRADE: E*TRADE Paper Trading
·
TD
Ameritrade: TD Ameritrade
paperMoney Virtual Stock Market Simulator
·
Interactive
Brokers: Interactive Brokers
Paper Trading Account
·
TradeStation: TradeStation Simulated Trading
· Webull: Webull Paper Account
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