As you may all know, the stock market is one place where you can build and grow your wealth. But as much as it is encouraging and exciting, there is a certain amount of risk involved with purchasing digital assets like stocks and securities. As a beginner, navigating through this vast, fast-paced, and unpredictable environment may be tough.
This is why it is essential for beginners to learn the fundamentals of the stock market and its ins and outs before investing their hard-earned money into the volatile environment.
Thankfully, there is a way to practice the art of stock trading without putting in actual money by following what many financial experts call ‘Paper Trading’.
Let me explain to you what Paper Trading is.
Overview Of Paper Trading
Paper Trading involves an investor learning trading skills necessary for the stock market in a virtual environment without investing any real money.
The technique involves market newbies and even day traders learning how to buy and sell stocks while keeping track of their trading positions, portfolios, and the profit and loss they made during a day of trading by hand.
The term paper trading has an interesting story behind it, and a rather historical one. Back in the day, one had to go to the physical stock exchange to buy or sell shares as there were no online platforms available.
Aspiring traders had to do away with a piece of paper to learn the art form, on which they would note down their trading strategies and ideas and manually compare them with the price movement of their preferred stocks in every single trading session.
The main advantage of paper trading is that the system allows investors to trade in a virtual setting that closely resembles a real-world stock market, where they are trained to better understand the effectiveness of their investment and trading strategies without the fear of losing any money.
These days, paper trading is for namesake as technological advancements have resulted in investors using fully digitized stock market simulators that closely resemble real-world stock exchanges to train themselves.
How Does Paper Trading Work?
As we mentioned earlier, Paper Trading is a technique to improve your trading skills where the mechanism teaches you how to move forward in the treacherous and unpredictable stock market environment.
To make the most out of the opportunity, new and novice traders should follow real trading practices and objectives. A paper trader must consider the same risk-return objectives, investment constraints, and trading horizon as they would do when directly investing in the stock market.
Transactions done on paper can be applied to live stock market conditions. For instance, when a trade is placed on a highly volatile trading day, it is more likely to experience higher differences in price compared to a normal day on the exchange, also known as slippage.
This is something every stock market investor should be watchful of and paper trading makes you familiar with such scenarios.
Paper trading can also be used by day traders and fresh investors to make themselves comfortable with various market order types like stop loss, limit orders, and market orders.
A number of virtual exchange platform also offers market charts, quotes, and news feeds to help traders test out their newly learned investment strategies.
What Are The Advantages And Disadvantages Of Paper Trading?
The main advantage of Paper Trading is that the mechanism eliminates the risk of loss. This is because the process involves using virtual money or paper to practice trades.
Without having to worry about losing your money on bad trades, you are able to come forward and make bold trading decisions.
Then there is the mental aspect of trading. Since stock trading puts you in a highly stressful environment, it can take a severe toll on your mental health in the long run because it fuels emotions like fear and greed.
When certain investments don’t go the way you want them, it can put you in a difficult mental position.
This is where one realizes the importance of paper trading as it allows you to practice adequate stock trading tactics before implementing them on the real market, which in turn helps keep your emotions and stress levels under control.
That way, you will view trading in a more objective rather than a subjective manner.
Since you use no real money to initiate trades while paper trading, there is no emotional attachment to the transaction.
This can lead you to take on more risk than you would normally have if real hard-earned money was involved.
There is also the case of individuals not taking the losses suffered while paper trading seriously, which can have severe implications when trading on the real stock market.
Another concern with paper trade is that the practice does not take into account the costs involved with trading.
Normally, traders incur a whole bunch of charges when conducting real trades such as brokerage commissions, fees, and taxes to name a few.
The margin from your trade can be low when these expenses are taken into account and it heavily determines whether you made a profit or a loss from the transaction. Paper trading fails to consider any of these aspects.
How To Start Paper Trading?
If you wish to try and learn your craft in stock trading, I highly recommend that you enroll yourself in a paper trading course or learn it yourself. There are many virtual trading platforms and software currently available in the market that use simulators to mimic markets in real-time.
These platforms show you how the price of stocks can fluctuate throughout the course of a day, while also providing you with research and analytics tools to better understand the probability of a volatile market, which will help you tune your investment strategies accordingly. You will gain significant knowledge and experience about the market by making use of paper trading software.
Paper Trading is one of the best ways to get yourself familiar with the stock market by learning its underworking. If you are someone with no prior trading experience or knowledge, then I highly suggest you try out paper trading.
The mechanism is also used by professional traders to improve their trading skills and to test out new investment strategies.
The practice gives you the confidence to invest in speculative securities such as futures and options in a virtual environment to give you a glimpse of how they can impact the profit or loss ratio of your investment portfolio in the real world.
Since investing in the stock market is a risk-involved activity, it is recommended to fully understand the sector and its underworking before putting in your money. Paper trading whether by hand or online, is a good place to start preparing yourself.
However, you need to be aware that this is a simulated environment based on a real market and all information you learn can only be taken as advice rather than a proven strategy. Always be mindful of your investments and do your own diligence before buying or selling a stock.