Pros and Cons of Paper Trading for Beginner Investors

paper trading

When you start investing, you may learn about “paper trading” as a method to test your trading skills.

Some people believe it’s an excellent method to learn and become a proficient trader. Others think it’s a waste of time.

Let’s go over some of the pros and cons of paper trading.

If you have never heard of the term, paper trading is a process that allows you to trade financial instruments without risking any capital. Many brokers offer paper trading when you open an account.

Many other investment news websites also make a paper trading platform available to those who sign up. Of course, it’s also possible to track simulated trades on a spreadsheet, too.

The most significant benefit of paper trading is that no capital is at risk. Also, most trading platforms that offer paper trading do not charge for this service.

In addition, many of these platforms support complicated features, such as shorting and options investing. It’s usually best, however, for beginners to stick with stocks until you get used to how trading processes work.

When you become more proficient at investing you can use paper trading to test out strategies. For instance, if you want to see how small-cap stocks will perform in a portfolio, you can set up a simulated (paper-traded) portfolio with small-cap stocks. 

Trading stocks can be intimidating for beginning investors. If your broker offers paper trading in your account, you should consider using this feature. It will help you learn how to place buy and sell orders.

Try the various functions your broker offers, like market and limit orders. Ask questions if you are unsure of any of the services. 

By learning your broker’s platform you are less inclined to make mistakes with real money. Executed trades are final and binding. Mistakes can cost you. It pays to understand the platform before putting real money at risk.

Many paper trading websites also run contests frequently. If you do well with your trading you can win money. These contests are usually free to join.

Cons of paper trading

The emotions associated with trading real capital is nothing like you have ever experienced. Newer investors are often overwhelmed after their orders are filled.

The stress occurs with experienced investors, too. They have learned how to deal with it. Paper trading can never capture that emotional rollercoaster ride associated with trading real money.

Getting good fills from your broker takes practice. It’s a combination of knowing the market, the stocks you’re trading, and even getting to know your broker.

If you feel your broker isn’t getting the best fills possible, you can choose another broker. This dynamic is not available with paper trading. You’re likely to always get good fills when paper trading. Not as much with real trades. 

Does getting good fills matter? That depends on the type of trading you are implementing. For long-term trades, the fills are less important. Still, you don’t want a broker who deviates sharply from the bid-ask spread.

Some paper-trading platforms consider commissions. If your platform does not calculate the impact of commissions, you’ll have to account for that when you make real trades. Many brokers offer commission-free trading, even on real trades, but that can change.

When you trade in a paper account, you are likely to trade more often than you would in a real account. The chances of finding a stock that skyrockets increases when you trade more stocks of different companies. With real trades you would not have the capital to pull this off.

You are also likely to buy riskier assets in a paper account than you would in a real account. The risk-reward ratio suggests that riskier assets tend to outperform less-risky assets in the short term.

5 Best Stocks to Buy If Biden Wins the Election

If Vice President Joe Biden wins the election on November 3, 2020, you might want to consider adding these five equities positions to your portfolio: XLU, TSLA, XLV, MLM, and

TGIF — Ending the Week with a Whimper

Everything is proceeding as I have foreseen. In Monday's "The Week Ahead — 200,000 Deaths Weigh Heavily on the Market," we knew the 200,000th American death would put Covid back

Even If the Overall Market Continues Lower, This Staple Could Maintain Its Upward Trend

Since peaking in early September, the main indices have all three stumbled for the last few weeks with the S&P and Nasdaq falling over 10% from their highs already. Three

tesla stock

TSLA Too Volatile? Two Option Strategies for Tesla Stock

Tesla Inc. (TSLA) is one of the most popular stocks amongst investors. Led by CEO Elon Musk the electric vehicle manufacturer has disrupted the transportation industry, bringing hype to a

pot stock

Pot Stock ‘Blood in the Streets’ Buy Signal Is Here

The cannabis market has been a volatile space in recent years. A wave in legalization, particularly in Canada but also through parts of the United States, led to significant growth

Use Options as Portfolio Insurance in Rocky Times

Since the beginning of September we have seen the main U.S. indices drop. There are a number of possible reasons for the decline, but more importantly I expect the increased

4 Foreign Countries Where You Can Retire On Social Security Alone

Someone once said that retirement is not the end of the road but a highway opening to a new chapter in life. Whoever said that clearly has never experienced a

We’re Beating the Index Off the March Low: Update

The Bulletproof Wealth Report model portfolio is continuing to perform well and is now up 27.4% since the inception of our monthly newsletter on April 13, 2018. Although the value

Terrible Tuesday: Fed’s Powell Says U.S. Faces Slow, Uncertain Recovery

Powell testifies before Congress today. We already know what he's going to say though, as his testimony is pre-released. Not that that will stop the market from acting shocked when

5 Best Online Banks, Highest Savings Rates for Your Buck

Finding an online bank can be difficult. Varying rates, hidden fees and simply having too many choices can cause confusion and make it hard to get started. Set aside some

Hiring a Financial Advisor: What Is a Fiduciary, and Why Should You Care?

“Fiduciary” is a funny word. You may have never heard of it until now, but you may actually have had a fiduciary in your life. More importantly, you may wish

Trading Cryptocurrency Using Limit and Stop Orders

This is the last of a five-part series to help new investors and traders start and grow a cryptocurrency account. In all five articles I’ve been using Bitcoin (BTC) in