What is Paper Trading?

Paper trading tools and facilities are offered by many companies and online trading agencies to lure investors as potential clients. While some may offer these services free, others charge a certain fee for paper trading. The idea is to initiate a new investor into the stock trading business. The new investor can try out the various strategies that he has read and heard, and track his investments, for which he has used artificial money, by jotting down the fees and their prices over a period of time.

Paper trading allows the newcomer to buy and sell stocks, or other financial assets to help them gain confidence without any fear of losing money. It helps them learn how to make bold decisions before they take the plunge. It is also possible to open an online account with an online market simulator.

Some of the benefits of Paper Trading are:

• Learning how to trade without losing any money
• Investing in an environment devoid of risk
• A platform to test one’s knowledge and ideas to gauge whether the approach is correct
• Comparison of results achieved with others in the field
• Check the earning potential and whether it is worth the effort to enter the stock trading business
• Can be a relaxing pastime for fun.

Paper trading is a mock trading exercise which can also be carried out by joining online paper trading clubs, which provide lessons and tutorials, tips and cues, and help in understanding the trading activities of all assets like commodities, futures, currencies and stocks. It proves fruitful for students as well who can understand real world trading before they complete their academic qualifications.

While paper trading is a highly beneficial exercise, there is a flip side to paper trading as well. Some of the problems faced include:

• Many potential investors use unrealistic amounts of artificial money in paper trading. This will often yield unrealistic results since such investments may not take place in real world situations. For instance, buying stocks worth 1 million dollars is easier in paper trading rather than in the actual stock market.
• The results coming out of a paper trading exercise can be misleading if the correct prices are not taken into account.
• Real world trading is very different from paper trading since it involves a different level of engagement, emotions and seriousness.
• Selling in a paper trading exercise always materializes, which may not happen in the stock market with limit orders or due to non availability of stocks.

However, these problems can be easily overcome by the earnest investor who takes his lessons in paper trading seriously, and will emerge with more knowledge and experience before he takes risks with his own money.