If you’re new to the world of trading, it’s only a matter of time before you find out that the stock market is a vast and unpredictable environment. Being a beginner, you might find it tough to navigate such a fast-paced setting.
That’s why it is highly essential for you to learn the ropes first before you actually invest your hard-earned money in the stock market. Thankfully, there’s a way to do that and it is what most financial experts call ‘paper trading.’ If you’re wondering ‘what is paper trading?’, then keep reading to know all about this exciting concept.
What is paper trading?
Paper trading is the act of practicing the art of trading in the stock market in a completely virtual environment without actually investing your money. This virtual environment is separate and whatever moves or trades that you make here will not have any effect on the real stock market.
Paper trading simulates the real world values and price movements of stocks and allows you to trade using virtual money. It allows you to test out your trading strategies in a real world setting to gauge the success or failure of the said strategies without putting your money at risk.
Here’s a fun fact for you. The term ‘paper trading’ or ‘paper trade’ came into being at a time when trading was conducted physically at the exchanges themselves instead of through an electronic platform. Traders and investors used to practice on paper by writing down their trading strategies and ideas and manually comparing it with the price movements of stocks on every single trading session.
But then, thanks to technological developments, traders can now paper trade using fully electronic stock market simulators that closely resemble real world stock trading platforms.
What are some of the advantages of paper trading?
Now that you’re well versed with the concept of paper trade, let’s quickly take a look at some of the advantages that it offers to traders and investors like you.
Since paper trading involves only virtual money, you don’t have to put your hard-earned money at stake to conduct practice trades. This eliminates all sorts of risk completely, allowing you to take bold trading decisions with more confidence. Without the threat of losing your money on bad trades, you would actually be in a better position to practice and learn the art of trading in the stock market.
When it comes to trading, your mental stress levels play a huge role. When you’re new to this activity, emotions like greed, fear, and stress might take over, leading you towards trades that don’t go according to your expectations. With adequate practice using paper trades, you can learn to keep your emotions and your stress levels in check. This allows you to view trading in a more objective manner.
What are some of the disadvantages of paper trading?
Let’s now take a look at the other side of the coin. While paper trading is a very good way to learn, it still suffers from certain disadvantages. Here are a couple of them.
Might lead you to take on more than what you can handle
Again, since you would be using only virtual money to conduct paper trades, you might not feel any attachment towards the activity. This might embolden you to take on more risk than what you would normally take if real money was involved. Furthermore, there’s also the chance that you might not take the losses that you suffer during paper trading seriously, which can have consequences in the real world.
Not accounting for other costs
While paper trading allows you to practice trading, it doesn’t take any of the other costs into account. During real trades, you would incur a plethora of expenses such as commissions, fees, and taxes, among others. This, when added up, has the potential to drag your profits down. Sometimes, the costs associated with trades can be the difference between a profit or a loss. Paper trades don’t help you prepare for this at all.
Owing to the proliferation of online trading accounts and platforms, paper trading has tremendously grown in popularity in recent years. Almost all brokerages these days offer you the tools needed to practice in a virtual simulated environment that’s designed to help you learn how to trade and backtest your trading strategies. Here’s a word of caution. Although these paper trading platforms simulate market movements, the data feeds may not always be real-time. You should take this into account before utilizing the platform.