As many people may think, earning some extra money doesn’t necessarily mean investing in the traditional stock market, or even going with cryptocurrency. Although these options might seem profitable, due to their perseverance and professional preference among traders in the past few years, they’re a bit risky for people who are now just starting to get into the trading universe.
Nowadays, the world of trading has a bunch of economical aspects and a serious number of possibilities that you can explore freely, meaning they can adapt to each and every type of trader. Today, I’m here to talk about one of them – paper trading.
If you’re not into risking real capital, paper trading is the right option for you. It’s a simulated trade that allows you to invest, buy or sell products, stocks, or any other currency without risking actual money. Think of it as a warm-up practice, which means that most of the aspiring traders practice on paper, before risking real money. Nowadays it’s easier than ever, especially due to the great mobile phone stock trading apps that offer it.
Let me show how it works and how it will definitely power-up your trading skills:
How Does it Work?
Every paper trader analyses all trades by hand, before putting them to action. With that, I mean hypothetical trading positions, portfolios, and profits or losses. Contrary to what an electronic stock market simulator does, this one is less risky because investors trade live markets without committing actual capital, and the process can even help them to gauge whether investment ideas have merit, or not. In other words, investors are able to test new investment strategies before putting them on a live account. Paper trading will teach you how to navigate platforms and make trades, without the nerve-wracking of a possible big loss.
On the other hand, it may give you a false security when you go to live trade, but that isn’t necessarily a problem. You now have the ability to consult apps that use real live data information to help gauge your success, allowing you to complete paper trades using a simulator that looks and feels just like the real thing. You also have the opportunity to test and risk according to your own financial possibilities. Practice is the key to success and paper trading allows you to start at the bottom and build your portfolio along the way, learning new strategies such as buying low and selling high, which usually are super challenging to adhere to in real life stock trading.
However, to get the most benefits, you should always think of paper trading as real-life material. For example, think about the risk-return objectives, investment constraints, and the real trading horizon as you would in a real live account. Also, paper transactions can vary alongside many market conditions. It’s obvious that a trade placed in a high leveled volatility market will result in higher slippage costs due to its wider spreads, which won’t occur in a market that is moving in an orderly manner. Lastly, traders and investors can use simulated trading to familiarize themselves with various order types: limit orders, stop-loss, or market orders. Quotes, charts, and news feeds are available on many platforms as well.
- You won’t actually be losing any money, so your money is always safe: You can test, and practice real-virtual live strategies without risking your capital. It’s perfect for beginners, as they can try out new strategies, and buy or sell securities using a particular trading platform without losing any money if their picks turn out to be bad ones.
- You can take your time! To maximize the potential of paper trading, spend as much time and effort as you need in researching a trade as you would if it were real. If the stock is worth the risk, or not, what limitations might be placed on your portfolio.
- Exceptional learning tool: Think of it as a game, where you can make risky moves without thinking about the consequences, and learn from them before going into the real business.
Even though this all may seem a bit strange, let me show you how it works by following an old-school method:
- Write a fixed sum of money down on a piece of paper (it’s easy if you choose a ‘round number’).
- Write down the names of the stocks you’re thinking of investing in (it will be more accurate if you go with multiple picks).
- Write down the current stock prices next to each name (don’t forget you’ll be buying a finite number of shares at a set price, based on current market conditions).
- Divide your total investing cash by the number of stocks (again, using ‘round numbers’ will be more precise while you’re practicing).
- Subtract $20 from that figure (most of the accounts charge a nominal fee per trade, for both stock purchases and stock sales. It’s not exactly $20 but it will allow you to be more realistic with your money).
- Divide that per-investment figure by the actual share price, rounding down.
You are now ready to track your investments by checking the stock price every day, after the closing bell!
What Are You Waiting For?
Keep in mind this idea: “Try, before you buy!” Paper trading is a powerful learning tool to improve your skills with less risk. Although you might not have any gains, you will have the possibility to see how it works in real life without committing to the financial failures and, let’s face it, without getting a headache each time you invest in the stock trading business. However, don’t forget that no real investment comes without its risks, and the type of paper trade you are following might suffer twists and turns in real life. You won’t be having any gains so you’ll probably feel some false confidence by not understanding the full picture.
So, stay informed as much as you can and explore the paper trading world before you commit to anything, as it is still a trustworthy method to use before facing the wolves of the stock trading business.