Just as the name implies, paper trading stocks are trading stocks not in a real brokerage account but in some form of record-keeping e.g. a spreadsheet or a journal. So, there is no real money involved, only your imaginary investment funds will be traded. How To Paper Trade StocksWhy Would Anyone Do This? As expected, trading on paper offers plenty of benefits for both the novice and the veteran investor. You will learn the ropes of stock investing without jeopardizing your real money. You will be able to apply your entry and exit strategies in a ‘simulated’ environment. In addition, you will also be able to refine existing investment strategies, choose the most reliable source of information and monitor stocks with great potential for your portfolio.
Of course, your approach to paper trading and the benefits to be gained from it are affected by several factors.
First, your motives in paper trading must be clearly defined from the beginning. For example, the results will be different when you intend to just learn how to trade in stocks as against when you want to test a new investment strategy.
Second, your steps towards using the paper trade stocks will affect the success of the entire exercise. For example, if you approach it in a haphazard manner, you definitely cannot expect to learn as much as when you have taken the necessary steps in the right order eventually leading to successful trades.
Do It Right
One of the most important steps in ensuring success in paper trading is the establishment of parameters. You want to customize these parameters to conform to your investment goals, your real money available for investment and your personal preferences. How To Paper Trade Stocks* Starting cash – This is the imaginary investment money poured into the stocks. Choose the amount that will closely approximate the real investment fund although it is a good idea to stay within the $10,000 to $20,000 range for starters.* Time frame – Although you can play around with paper trade stocks forever, it is best to set a time frame for evaluation purposes.* Screening Method – This can be done through the set of criteria for the stocks that will be invested on albeit in an imaginary manner. For example, it can be that trading is performed on a certain industry only or on certain penny stocks or on many types of stock so as to get a feel for the whole market.* Trading prices – If you were trading in the real world, the prices of the paid shares of the stick are easily available from your online broker. However, with trading in paper trade stocks, you will have to choose the meter on which to gauge stock prices. It can be the day’s closing or opening prices just as long as you choose one.* Trading activity – You have to act as if the whole paper trading process is a real-life scenario. Thus, factor in broker’s commission, keep extensive notes on your moves and monitor your investments. This way, you have written notes to scan through when you are at a crossroads of decision-making for your real money investments.
Paper trading is one of the best tools available for stock investors who desire to gain experience in the markets without losing a single dime. So, starting today, do look into paper trade stocks and build your imaginary wealth.