Paper Trading – Learn to Trade Before Committing YOUR Money

Buy-and-hold investing is recommended for most investors, especially beginners. But what if you’ve already built a firm foundation of passive index fund investments and you want to try your hand at active trading? Or what if you are already an active trader who is looking to up your game?

One thing is for certain, you can lose a lot of money actively trading if you don’t know what you’re doing. But one sure-fire way to remove the risk from the learning curve that comes with trading is to work with a paper trading account.

Table of Contents
  1. What is Paper Trading?
  2. How Long Should I Paper Trade?
  3. The Pros and Cons of Paper Trading
    1. Pros:
    2. Cons:
  4. Best Paper Trading Apps
    1. TD Ameritrade
    2. E*TRADE
    3. Webull
    4. TradeStation
    5. Fidelity 
    6. Interactive Brokers
    7. MarketWatch
    8. Investopedia 
  5. Bottom Line

What is Paper Trading?

Paper trading is an account that provides for simulated trades using virtual money. A broker will give you access to their trading platform where you can trade using a set amount of virtual currency. That can be anywhere from $100,000 up to $1 million. That will give you plenty of room to make multiple trades until you feel comfortable enough to go live with real money.

Paper trading accounts are typically free to open, though you may be required to open a brokerage account to participate. And if the broker has a minimum initial investment requirement, you may need to front that money before you begin paper trading. Of course, you won’t commit any of your actual money to your paper trading activities.

Much like test driving a new car you are interested in buying, paper trading gives you an opportunity to try your hand at investing before committing to the real thing.

How Long Should I Paper Trade?

The answer to this question will be different for everyone since everyone learns at a different pace. But as a general rule, you should continue to paper trade until you feel comfortable enough with investing to begin trading with real money – or until your virtual currency runs out. But even if it does, you can continue paper trading by opening an account with a different broker that offers such accounts.

One issue you should resolve in your own mind before you begin paper trading is the type of securities you plan to trade. The common choices are stocks, exchange-traded funds (ETFs), and options, but some platforms offer other choices as well.

It’s an important decision because you will need to become comfortable trading one class of securities before moving on to another. For example, you may want to begin by trading ETFs before moving on to individual stocks. And you may want to master trading individual stocks before moving on to options.

You may also want to find resources that will help you choose investments. Here are our best stock-picking newsletters and here’s our list of free stock analysis software to get you started.

The Pros and Cons of Paper Trading

The advantages of paper trading should be obvious (though we are going to spell them out anyway), but you should be aware of the disadvantages as well. There are a few.

Pros:

  • Learn to trade without risking any of your own money.
  • Paper trading provides an opportunity to learn not only trading, but also to familiarize yourself with the trading platform where you will eventually be trading live.
  • Paper trading offers you an opportunity to learn trading while you are building up your account balance for live trading.
  • Generous virtual currency allowances – of up to $1 million – will give you plenty of room to experiment with different strategies and even security types.
  • Paper trading may stimulate you to seek outside resources that can also benefit your trading activities.
  • On some platforms, you can connect with other virtual traders, enabling you to swap investment strategies, information, and concerns.
  • If you discover trading isn’t the right activity for you, you can close your paper trading account without any cost or loss of investment funds.

Cons:

  • Any gains you earn during your paper trading activity won’t be real. That may hurt a bit, especially if you’re successful early on.
  • While paper trading will help you learn the mechanics of trading, it’s not quite the same thing as trading with real money. Real money means the stakes are higher, because potential losses are real. That can affect your willingness to take risks, an important emotional component of trading that you may not develop through paper trading activities.
  • Paper trading success may cause you to be bolder with live trading than you need to be.

Now that you’re familiar with the benefits and disadvantages of paper trading, let’s move on to the places where you can play the game.

Best Paper Trading Apps

If the idea of paper trading before committing real money appeals to you, there are plenty of choices. Some are offered by some of the biggest names in the investment brokerage industry. Others are offered by providers that aren’t even brokers. You can choose which will work best for you.

TD Ameritrade

TD Ameritrade’s thinkorswim Trading comes in three versions, Web, Desktop, and Mobile. Each allows you to participate in their paperMoney virtual trading platform. When you sign up for the paperMoney practice account, you’ll be able to trade risk-free with $100,000 in virtual money. It will enable you to trade any investment product available on the live trading application. The paperMoney feature is considered especially valuable in prepping for options trading.

That will provide you with plenty of funds to test-run various investment strategies and help you to hone your investing skills.

TD Ameritrade requires no minimum initial investment or minimum balance and offers commission-free trading of stocks, options, and exchange-traded funds (ETFs). You can trade 24 hours a day, five days per week, and the platform features excellent customer service.

E*TRADE

E*TRADE offers their Paper Trading service where you can upgrade your trading skills and test trading strategies. It can help whether you are a first-time trader needing to learn the ropes, or an experienced trader looking to improve your results. The feature can be used to practice trading stocks, options, and other equities.

E*TRADE has become one of the more popular trading platforms in recent years. This is because they offer no minimum account requirements, either to open an account or to maintain one, and no trading commissions for stocks, options, and ETFs. And they also offer more than 4,000 no-transaction-fee mutual funds, as well as the ability to trade just about any type of security. 

Their Power E*TRADE trading platform is widely regarded as one of the best in the industry. E*TRADE also offers 24/7 customer support by phone, email, and live chat.

Webull

Webull’s Paper Trading is a surprisingly good virtual trading tool, given that Webull is only a limited trading platform. But that’s because you can do just about anything with Paper Trading that you can do with the regular trading platform. And it has what is probably the highest virtual portfolio balance, at $1 million.

Webull may be a limited trading platform, but what it does, it does extremely well. They offer only U.S. stocks, options, and ETFs, but you can also trade cryptocurrencies. It’s especially strong for options, because not only are there no commissions on options (or stocks and ETFs for that matter), but Webull also charges no per-contract fee, which is a common fee that’s charged by most brokers.

Webull requires no minimum initial investment and has no ongoing minimum account balance requirement.

As a bonus, you can get free stock from Webull without making a deposit (and you get more if you do).

TradeStation

TradeStation offers their Simulated Trading tool to help you gain trading experience without risking any of your own money. And along with the virtual trading account, you also have access to a large inventory of historical databases that can help you to back test various trading strategies. The tool can accommodate trading of stocks, options, and futures.

Unlike some of the other brokers on this list, TradeStation does require a minimum initial investment, though it’s only $500. But it offers one of the widest ranges of investment choices in the industry, extending to penny stocks and even cryptocurrencies. And once you move on to live trading, they offer one of the best suites of trading tools and resources in the industry.

As is the case with other brokers, stocks, options, and ETFs can be trading commission free. But in a feature offered by only a select few brokers, TradeStation offers participation in their investment community. That will give you an opportunity to find out what other investors are doing, and even to swap investment strategies.

Fidelity 

Fidelity does offer a virtual trading account with their Active Trader Pro platform. But it’s not as robust as those offered by some of the other platforms on this list. That’s surprising, given that Fidelity is one of the largest and best investment brokerage firms in the world.

But the limited, virtual paper trading account aside, Fidelity does offer one of the best service packages for investors. No minimum initial investment is required, nor is there a minimum account balance requirement. You can open just about any type of account, and trade in nearly any security available in the industry.

Not only do they offer commission-free trades on stocks, options, and ETFs, but they also offer more than 3,000 no-transaction-fee mutual funds. And their customer service is among the best in the industry, with 24/7 phone support, and about 140 brick-and-mortar locations in major metropolitan areas across the country.

Interactive Brokers

Interactive Brokers offers a paper trading account, but a regular trading account must be approved and funded before you will be eligible. Your account will start with $1 million in virtual currency, which will enable you to trade equities. But you’ll also be able to take advantage of all the trading facilities offered by Interactive Brokers, making you well prepared for trading with real money.

Interactive Brokers has no minimum initial investment requirement for most accounts, though there is a $2,000 minimum for margin accounts. Virtually any type of account can be opened, and all major asset classes traded. There are no commissions for trading of stocks, options, or ETFs, and they also offer more than 8,000 no-transaction-fee mutual funds. Customer service is available 24 hours a day, six days per week. 

But one of the biggest advantages of Interactive Brokers is that they are available to investors and traders both in the U.S. and internationally. That includes countries in Europe and Asia.

MarketWatch

MarketWatch offers their Virtual Stock Exchange, with the motto “Trade Stocks. Make Money. Earn Bragging Rights.” No, you won’t earn real money, because it’s just a game. But it’s a fully responsive system, offering advanced trading, and even the ability to create custom watch lists.

MarketWatch isn’t an investment broker, so you won’t need to fund an active investment account. Instead, it’s one of the most prominent financial websites on the Internet, providing real-time investment feeds and news.

You will need to register and open an account to participate, which takes only a few minutes. They provide an instructor guide and sample course materials to help you get started. You’ll be able to trade stocks in real time, discuss strategies with other participants in the game, and even compete against your friends to see who is the most successful investor on the program leaderboards.

Investopedia 

Much like MarketWatch, Investopedia is not an investment broker. Instead, it functions as an encyclopedia for financial and investment information. But they do make paper trading available through their Stock Simulator. It comes complete with $100,000 in virtual cash and enables you to connect with more than 700,000 participants worldwide. You can not only share investment strategies with other participants but also compete to see who has the best investment results.

You’ll need to register for the service, but there’s no cost to participate, and no brokerage account that needs to be opened. One factor to be aware of, however, is that there’s a 15-minute lag in trade execution, which means you’ll be trading in something less than real-time. And since they don’t offer a brokerage option, it may not be the best choice if part of the reason for using a virtual trading platform is to familiarize yourself with a live platform.

Bottom Line

Active trading of investment securities has become more popular in recent years, from a combination of online trading accounts, commission-free trades, and a stock market that has gone nearly straight up for more than a decade. But active trading isn’t a risk-free proposition, and not everyone has the emotional makeup – or the bankroll – to make a success of it.

Before you begin actively trading investments, start by using a paper trading account. It’ll give you an opportunity to test your current knowledge, gain experience, and learn how specific trading platforms work. All of that will make you better prepared to begin trading with real money, and minimize the risk when you do.

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About Kevin Mercadante

Since 2009, Kevin Mercadante has been sharing his journey from a washed-up mortgage loan officer emerging from the Financial Meltdown as a contract/self-employed "slash worker" – accountant/blogger/freelance blog writer – on OutofYourRut.com. He offers career strategies, from dealing with under-employment to transitioning into self-employment, and provides "Alt-retirement strategies" for the vast majority who won’t retire to the beach as millionaires.

He also frequently discusses the big-picture trends that are putting the squeeze on the bottom 90%, offering workarounds and expense cutting tips to help readers carve out more money to save in their budgets – a.k.a., breaking the "savings barrier" and transitioning from debtor to saver.

Kevin has a B.S. in Accounting and Finance from Montclair State University.

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  1. Libra says

    I have learned that it is not timing the market–It is TIME IN THE MARKET.. Recently Tesla and Apple rewarded their shareholders with big splits and then kept right on growing. There are some stocks that should be held forever and of course I Dividend Re-invest all dividends. Buy good stocks and keep an eye on them . In this low to non-existent interest rate period of time–the stock Market is where the growth is.

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