What is Paper Trading?


Paper trading is a simulated trading process wherein you can actually practice trading ‘on paper’ without committing any real money. It is great for beginners who have no real knowledge of the stock market but want to learn without risking actual money. However, critics feel that trading on paper can in no way be the real thing since the emotions at play are very different in both the cases. It is regardless a great tool for learning, testing out new strategies and generally sharpening your online stock trading skills.

How Does One Do It?

To paper trade, all you really need is a notebook to note down your pretend buys and sells along with the resultant profit and losses as if you’ve actually made them. This is tedious for some because it requires extensive calculations which not everybody is good at. It also does not give you the experience of dealing with a brokerage or a live exchange.

A good alternative is to sign up for an online paper trading service. There are two kinds of such programs. One kind allows you to interact with an actual commodity broker who places your orders and tracks your trade results.  The second is an online trading demo account where you get the chance to place orders in a hypothetical account and the accompanying software tracks your gains and losses. This is also far more interesting than noting on paper.

Pros And Cons Of Paper Trading

The biggest benefit of this type of trading is the ability to practice without putting any money at stake. Even for consummate professionals, trading on paper remains a great way to test a new strategy before actually trying it out in the real world. Paper losses and gains can give you an idea if you have any acumen in online stock trading or not without loosening your purse strings. This also helps build discipline which can hold you in good stead when you actually start for real.

The cons of trading lie in its inability to give you the feeling of ‘fear’ or stress  that accompanies investment of one’s own money or even the real world emergencies like power outages, trading halts, etc.  Therefore the decisions that your paper records reflect are not really those you would make if you were trading with real money. And there lies its greatest weakness.