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Paper Trade

Updated on May 3, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is Paper Trade?

A paper trade, virtual trading, is a stock trading practice for educational purposes. It allows investors to trade in securities without investing real money. In addition, it facilitates the investors to learn and gain expertise in various trading strategies by keeping track of their positions and portfolio on a virtual trading platform.

What is Paper Trade

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Most paper trading accounts perform on the stock market. Simulators work almost like a live trading account. You can use most order types, trade in different stocks, and try various features in any real trading platform. However, these types of trading has some limitations as it does not address important aspects like the trader’s emotions, the quantum of trade, etc.

Key Takeaways

  • Paper trading, or virtual trading, is a practice where individuals simulate stock trading for educational purposes. 
  • It enables investors to trade securities without using real money, allowing them to gain experience and knowledge in various trading strategies. This is done through virtual trading platforms that mimic live trading accounts, providing a realistic trading environment. 
  • Paper trading primarily focuses on the stock market, allowing individuals to practice trading stocks without risking actual capital. 
  • The simulators used in paper trading closely resemble real trading accounts, providing a valuable learning experience.

Paper Trade Explained

Paper trading provides a learning platform for new investors to try different trading strategies and make decisions like selecting securities, entry, and exit points.

Some brokers on the paper trade platform provide virtual trading platforms with live platforms, while others offer separate paper trading platforms and stock simulator games. In the case of a live trading account, investors need to select the virtual trading option.

You might need to register for your paper trading account and take a market data subscription, as these can be the same as your live trading account. You are provided with a certain amount of virtual cash to start the trade-in, such as an account whose value will change based on the profit/loss.

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Advantages & Disadvantages

Let us understand the advantages and disadvantages of a paper trade account through the discussion below.

Paper trade advantages and disadvantages

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Advantages

#1 – Hands on Experience in Online Trading Platform

By paper trade, you will come to know about the following features: –

  • Each transaction shows the number of shares purchased, the cost at which one bought the share, and the current price of your purchase.
  • It gives you a real-time update of the fluctuation of each share.
  • Shows total profit and loss of the portfolio.
  • Gives you a daily MIS of each trade.
  • Allows you to execute the trade quickly by either buying more, selling, or closing your position.
  • Quickly looks at all types of graphs to analyze the technicalities of each share.

#2 – Learning about Trading without Risk

Paper trade of stocks helps the new investor learn the trading and get the look and feel of the share marketShare MarketThe share market is a public exchange where one can buy and sell company shares based on the demand and supply of shares. read more. One of the significant roadblocks involved in starting trading is the fear of losing money. The virtual platform gives you the facility to execute trades without any fear. You can explore different investing styles and see which strategy fits your business. This platform allows you to compete with other traders and assess your performance.

#3 – Ability to Test Different Strategies

Growth, momentum, options, value, foreign, commodities, bonds, and mutual funds Mutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more. All have their pluses and minuses, and the simulators allow you to explore all of them with no risk to you. Much of investing is analytics, and virtual trading gives you scope to do experiments with the trading and derive the strategy that suits your style.

#4 – Ability to Make Mistakes

Paper trading allows you to make a mistake and learn from your mistakes without losing money. That can sometimes be the biggest benefit of all. Of course, every investor makes mistakes while trading and takes wrong calls, but our ability to learn from those mistakes will lead us to our greatest achievements.

Disadvantages

#1 – Market Condition Is Not Always Real

Market conditions in the paper trade are not necessarily always real. For example, sometimes this type of trading gets delayed by 30 minutes, or maybe it’ll be a few hours delayed. So even if you have a real-time trading account or software, market conditions are still not the same because they also affect you during the live trading.

When they affect you, your stress also impacts your emotions, so the overall conditions will not be the same when you’re trading paper money Paper MoneyPaper money is a country's currency in banknotes that have a specific value and pay for goods and services. Paper money holds a country's government backing while the central bank controls the note's printing and circulation.read more as you are with real money. For example, virtual trade will make your decision more independent and relaxed. Still, your strategy might not be the same in live business, and the decision will be more affected by various emotional factors.

#2 – Personal Trade Don’t Impact the Market

Another major disadvantage is that your trades do not impact the paper trading market. So, for example, remember that businesses typically trade on volume and if a stock is trading 400,000 shares per day. So, it is a $9 stock if you are putting it in. So, for example, $100,000 or $200,000 into that stock, and with that trade very likely, you will move that stock to the upside, or when you sell it, you will move it to the downside.

Paper Trade vs. Real Trade

A trade is a means to making gains and understanding the movements of the market. However, the two types of trade as mentioned above are widely discussed and often confused with one another. Let us understand the difference between a paper trade account and a real trade through the comparison below.

#1 – Paper Trade

Paper trading of stocks helps us learn how to execute trades efficiently; we try different strategies without any fear of losing real money in such transactions. You can try various businesses until you get the expertise of executing the trades without making any mistakes and with more perfection, such as the right time to take the position and exit the position, selecting the proper bid size, etc. But, in this type of trading, the investor does not come with real-time sentiments. In the back of their mind, they know that real money is not involved.

#2 – Real Trade

A real trading account, on the other side, involves real money. Emotions like greed, fear, and patience will come into play when you trade real money, and control of these emotions is a significant parameter in real trading. Feelings like fear make you exit the winning trades early and limit your profit. Greed keeps you in a profitable business that reverses and reduces your yield. Real Trade investors should have trading rules to ensure they do not let emotions sabotage their trading.

Frequently Asked Questions (FAQs)

1. Is paper trading considered a reliable way to simulate real trading?

Paper trading is a valuable tool for novice traders and investors to gain experience and practice their trading strategies without risking real money. However, while it simulates the process of placing trades and monitoring market movements, it has limitations in replicating the emotions and psychological aspects of real trading. 

2. Can paper trading help improve trading skills and performance in real markets?

Yes, paper trading can be valuable for improving trading skills and performance in real markets. It allows individuals to test and refine their trading strategies, analyze market patterns, and gain confidence in their decision-making abilities. In addition, by observing the outcomes of their paper trades, traders can identify strengths and weaknesses in their strategies and make necessary adjustments. 

3. Are there any recommended strategies or guidelines for effective paper trading?

In order to make paper trading more effective, several strategies and guidelines can be followed. Treating paper trading as seriously as real trading is important by setting specific goals, managing risk, and adhering to a trading plan. This includes keeping a record of trades, analyzing performance, and identifying areas for improvement. Furthermore, traders should try to simulate real market conditions as closely as possible.

Recommended Articles

This article is a guide to what is Paper Trade. Here, we explain its advantages and disadvantages and compared it with a real trade. You may learn more about financing from the following articles: –

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