Stock market is a trendy yet risky way of earning money. Some people invest here to earn some extra penny apart from their usual income while some opt this market as their basic income source. I’m sure you are already aware of the term stock market and the risks associated with it. But do you know that you can actually practice how to trade in the stock market on a platform similar to that of the real one. Although the money used here is not the real one. This thing is called Paper trading or sometimes demo or virtual trading. What is paper trading? How does it work? Its pros and cons, popular paper trading apps we will talk about everything that one needs to know as a beginner.
WHAT IS PAPER TRADING?
A simulated trade that allows the traders to practice buying and selling in a way similar to that of real trading is how you can define it. In this no real money is used. It can be the best way to test an investment strategy before employing it into a real account. There are various platforms available these days that allow the investors to practice trade in live market without using any real money. It helps you to learn how things work in the stock market. What strategies you can use to increase profits and reduce the risks of loss. It is most likely that people who involve themselves in paper trading before going for the real trading business, make good decisions. Many stock market experts also advise the newbies of this field to practice buying and selling via paper trading first.
HOW IT WORKS?
Paper trading allows the traders to make investments with an account that looks and works similar to that of a real online trading account. The account holder receives a huge amount of virtual money and allows the user to invest it according to their will. If all of the virtual money is spent then the user can use the reset setting to add more money into their account again. Similar to that of the real account, the paper trading account shows market movements on the traders’ screens. This allows them to decide if they should continue their trade or get out. All of this contributes to assessing their actions and helping them to learn and get ready to start trading in their real account.
PROS OF PAPER TRADING
Now that we know what paper trading is, let’s talk about the pros of it.
Offers no risk
The traders are given virtual money to invest. As it costs you nothing so you are not going to lose any money even if you make a poor decision. You can analyze your flaws and plan your next strategy in a better way.
Gives no stress
Since no real money is used in paper trading, any loss won’t cause the traders much stress. The two emotions evoked by trading namely greed and fear, blind the traders to do proper risk management. Here the feeling of greed and fear is not evoked since the money is not real. This allows the traders to learn risk management.
Best place to practice
Paper trading platforms allow the investors to practice trading by providing the environment similar to that of a real trading platform. The traders can learn how to use real money software in a relaxed environment.
Practice makes a man perfect. This applies in every field. Not only that if it builds the confidence in the traders and pushes them to take bold decisions in the real market.
Learn new approaches
It allows the traders to learn new techniques and statistics. You can make new strategies and check their fertility. If not good then try a new strategy. It allows you to run the hit and trial method as many times as you like.
CONS OF PAPER TRADING
Paper trading has its demerits as well and to name some:
- It fails to address the broad market’s impact on individual securities. While results may look great or terrible on paper, broader conditions may have created the results.
- It doesn’t show the hidden costs like that of slippage and commissions.
- When there is no real money used, there is no emotional hindrance at any loss. But when real money is involved things can get real tough.
- Using virtual money and real money are two different things. While paper trading sets the traders to trade higher virtual amounts, in real trading such an investment can be very risky.
PAPER TRADING APPS
There are some popular and easy to use paper trading apps. Even if you are a beginner you can easily create your account on these platforms and start paper trading. Some of the apps also allow the traders to create free paper trading accounts. To name some:
- Trading 212
New participants are benefitted by paper trading as it allows them to learn the key steps of risk taking, the selection of securities to the final exit. But the process has its demerits as it underplays the impact of index correlation and emotional reactions in a typical market day. Even so, it is advised that the newbies should spend a considerable amount of time in it. They should polish their new ideas and strategies before risking real capital and gain as much experience as possible.