What is Paper Trade?
A paper trade is a virtual trading, is a form of practice stock trading for educational purposes and allows investors to trade in securities without investing real money. 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.
Most Paper trading is done on the stock market simulators works almost like a live trading account in which you can use most of the order types, trade-in different stocks and try different features available in any real trading platform.
How it Works?
- Some brokers provide Virtual Trading platforms with there live trading platform and Some other brokers provide separate paper trading platforms and stock simulators games. In the case of live trading account investors need to select the virtual trading option.
- You might need to register for your paper trading account and may need to take a subscription of market data as these can be the same as your live trading account. In such an account you are provided with a certain amount of virtual cash to start the trade whose value will change on the basis of the profit/loss.
Paper Trade vs Real Trade
#1 – Paper Trade
Paper trading of stocks helps in learning how to execute trades efficiently as in such trades we try different strategies without any fear of losing real money. You can try different trades 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 proper bid size, etc. But in this type of trading, the investor doesn’t come with the real-time sentiments as in the back of mind somewhere they know the 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 on these emotions is one of the major parameters in the case of real trading. Emotions like Fear make you exit the winning trades early and limit your profit. Greed keeps you in a profitable trade that reverses and reduce your profit. Real Trade investors to have trading rules in place to make sure you don’t let emotions sabotage your trading.
Some of the advantages are as follows:
#1 – Hand on Experience to Online Trading Platform
By paper trade, you will come to know about the following features:
- Each trade shows the number of shares purchased, cost at which share was purchased and the current price of your purchase
- It gives you a realtime update of fluctuation of each share.
- Shows total Profit & Loss of the portfolio.
- Gives you a daily MIS of each trade
- Allows you to execute the trade quickly by either buy more, sell or close your position
- Quick looks at all types of graphs to analyze the technicals on each share.
#2 – Learning of Trading without Risk
Paper Trade of stocks helps the new investor to learn the trading and get the look feel of the share market. One of the major 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 aspects and styles of investing and see which strategy fits for my trades. This platform gives you the ability 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. All have their pluses and minuses and the simulators give you the opportunity 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 gives you that same ability to do the mistake and learn from your mistakes without losing actual money. This can sometimes be the biggest benefit of all. Every investor makes mistakes while trading and take wrong calls but it is our ability to learn from those mistakes that will lead us to our greatest achievements.
#1 – Market Condition Is Not Always Real
Market conditions in paper trade are not necessarily always real, sometimes this type of trading gets delayed by 30 minutes or maybe it’ll be few hours delayed even if you have real-time trading account or software still market conditions are not the same because they also affect you during the live trading.
When they affect you this also impacts your stress, it impacts your emotions so the conditions overall aren’t going to be the same when you’re trading paper money as you are with real money. During virtual trade, your decision will be more independent and relaxed but in live trade, your strategy might not be the same 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 own personal trades don’t impact the market when you’re paper trading. For example remember that trades typically trade on volume and if a stock is trading 400,000 shares per day and it’s a $9 stock if you’re putting in let’s say $100,000 or $200,000 into that stock and with that trade very likely, you’re going to move that stock to the upside or when you sell it you’re going to move it to the downside.
Paper trading provides a learning platform for the new investors to try different trading strategies and take decisions like the selection of securities, the decision of entry, and exit points. But this type of trading has some limitations as it doesn’t address important aspects of trading like trader’s emotions, the quantum of trade, etc.
This has been a guide to what is paper trade and its definition. Here we discuss how paper trading of stocks is done along with advantages and disadvantages. You may learn more about financing from the following articles –