How To Practice Investing with Paper Trading

They say practice makes perfect, and in many ways that applies to investing too.

While there’s no such thing as perfection in the markets, there is the ability to practice with paper trading.

Paper trading simulates live trades without risking money. You can use a paper trade account to learn about investing, practice buying and selling stocks, and test strategies you want to implement in your portfolio.

Most paper trading accounts offer the same tools and features you’d use during live trades, enabling you to test an investment platform before committing to it. 

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How Does Paper Trading Work?

Paper trading is a type of account you can use to learn how to trade stocks, bonds, or other assets. 

Think of it like training wheels for investors. Instead of investing real money, you use fake money to invest in actual market conditions and strategies. 

Paper trading is a risk-free way to start investing.

Many paper trading accounts offer the same features and functionality as a live trading platform without the risk of losing money. 

They allow you to place trades and test different strategies, with access to tools and charts so you can evaluate your performance. 

Paper trading also helps you become more aware of market conditions. The more you make trades, the more familiar you’ll become with different patterns and business cycles. 

This will help you build confidence, which is important because emotional responses to market swings can often drive investing decisions.

A new investor may choose to use a paper trading account while they’re learning to invest, but paper trade accounts aren’t limited to newbies. Advanced investors might use paper trading to test their thesis and make changes before deploying capital against it. 

READ MORE: What To Look for When Buying Stocks

How to Paper Trade

To start with paper trading, set up an account with a brokerage firm that offers it. Webull is one option to consider. It offers advanced charting tools you can access on your phone or computer. 

Once you’ve set up an account and are logged in, you can set up paper trading in your account.

You’ll get a virtual balance to start investing with. Think of this like Monopoly money. You can use this money to learn how to use the platform, practice buying stocks, and test different investing strategies. 

At any time, you can reset your account and start over.

To place your first trade, look for the stock symbol you want to trade. Choose the type of order you want to make and how many shares you want to purchase. 

You can also customize your user dashboard with charts and widgets to track your account’s performance.

Webull offers a robust learning library to help new investors. Whenever you come across a concept you don’t understand, you can search the learning library for it. 

Once you understand the concept, test it in your paper trade account and evaluate the results. Repeat this process over and over again to learn and validate your skills.

READ MORE: How To Use Webull: A Beginner’s Guide to Setting It Up

Pros and Cons of Paper Trading

Paper trading is a great practice for all types of investors, but remember it’s just that: practice.

Pro: No-risk way to learn how to invest

Paper trading accounts use fake money. 

Because you aren’t putting any of your own cash on the line, it’s a great way to learn how to invest for the first time or test new strategies.

Pro: Learn how the market works

Investing can be very abstract. The process of placing an order or adding stocks to your portfolio is very different from executing a broader strategy like saving for retirement. 

A paper trading account will help you understand some of the details of trading.

Pro: Track your performance 

Even though a paper trade account is funded with virtual money, your portfolio exists in live market conditions. 

This allows you to test different strategies and scenarios to validate what works and what doesn’t.

Con: You won’t make any money

The biggest drawback to paper trading is that it isn’t connected to any real cash values. 

If you pick a stock that suddenly goes up in value — as GameStop did in 2021 — you won’t benefit from any of the gains reflected in your account. 

Paper trading simulates the market, but don’t expect to make any money unless you put money in.

Con: Can’t test real emotions on investment decisions

While paper trading can help you understand how you might react in a particular scenario, you’ll likely behave differently when real money is on the line. 

A paper trading account can help prepare you, but it isn’t a good substitute for making trades when stressed or under duress.

Con: You might build too much confidence

Paper trading simulates the process of investing, but it isn’t actual investing. If you do well as a paper trader, you might assume you’ll do well making live trades. 

But there is no guarantee of success, so manage your expectations accordingly.

FAQs

Is paper trading profitable?

Paper trading isn’t profitable. Because no money is involved, making money as a paper trader is impossible. 

Instead, paper trading can be used to test out strategies that could prove profitable later on.

Is paper trading legal?

Paper trading is legal and offered by several brokers. It’s a tool for helping investors learn how to make trades without putting real money at risk.

TL;DR: Should I Try Paper Trading?

Paper trading is like your investment sandbox — a way to learn trading without losing real money. It lets you practice strategies before putting your actual cash on the line.

Just remember: Paper trading isn't the real deal. While it's great for learning, it can't fully simulate the stress of trading with your own money and you’re not getting any real monetary growth from paper trades.

For more tips on learning how to invest, check out these episodes of the Erika Taught Me podcast:

• Investing in the Stock Market Explained: A Guide for Beginners
• How To Invest for Beginners (Step by Step)
• Investing Advice from the Most Powerful Woman on Wall Street

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