What Is Paper Trading?

Do you want to get into investing, but you’re unsure of how to do it right and nervous about losing money while you figure it out? Then paper trading could be the perfect activity for you.

Paper trading is like a simulation: you can act as if you’re trading, but there’s no money on the line to be lost or gained.

So why would you start paper trading when you could start making money? Learn more about how to use paper trading to improve your investing performance.

Why Use Paper Trading

More than half of Americans have money in the stock market, so the choices that traders make have a serious effect on the nationwide economy. Because of that, investors used to write on paper their predictions that they weren’t willing to put real money on. They would then check in later to see how their predictions did, and use that to inform future decisions.

Now, everyone can have access to these tools with demo accounts online. You don’t need to be a Wall Street professional to try out your predictions and see how they’d do if you had put money on them.

A demo account for paper trading online allows you to mark your predictions and get regular updates on how they’re doing with educational, online resources at your disposal.

For those joining the investment market for the first time, this is the perfect tool to learn about the market and see what predictions will do well for you when you use money. It can also be a good tool for seasoned investors, just like for traditional Wall Street traders, to test your more doubtful predictions.

The Pros and Cons of Paper Trading vs. Live Accounts

If you’re ready to jump into the world of investing, it may be difficult to see the advantages of paper trading vs. using live accounts. However, it’s important to see both the benefits and the drawbacks of using simulation accounts. Here are some to keep in mind.

Pros

  • Test market predictions without losses. Test out your predictions without risking or losing a cent!
  • Follow your predictions. Perhaps you have a prediction as a passing thought. You may even write it down. But without a paper trading account online, you may forget to follow up, missing out on a great opportunity to learn about the market and your prediction accuracy.
  • Learn the market. Once there’s money is on the line, it can be frustrating to then learn all the resources and tools available to you. Before you start putting money on the line, paper trading lets you explore the market and practice trading online.

Cons

  • Trade without profits. The unfortunate flip side to no risk is no gain. While you may not lose on your poor choices, you also won’t gain anything for your great predictions like you would with a live account, which can be disheartening. So when you’re ready with solid predictions, it’s probably time to start a live account.
  • You may not notice the poor predictions. You’re learning the market, and you get a sense of euphoria every time one of your predictions does well. But without real money on the line, you may not notice your losses as much and give into confirmation bias. Make sure you’re paying attention to both your good and poor predictions and learn lessons both have to offer.

Is Paper Trading Right for You?

When you’re not quite ready for a live account, you should try paper trading. There’s no risk, but you can immediately start learning about the market.

Don’t waste time wondering how you would do in the stock or forex markets; try it out for yourself with paper trading and go one step further towards making your first investment.