This article explains what paper trading is, the difference between trading and investing and when to move on from paper trading.
Money question received
Hey guys, first time here. I have been learning, practising and also losing money since Jan 2019. I have been with a demo account since 2019, where I started with 20k, went down to 12k and since Sep I’ve raised the balance up to 41k. I have been cautious with my entries and quite realistic, not doing much different from what I’d do with real money. I seem to have 80% positive results, but I’m not sure if I should trust the demo account where its just to lure us in and lose money on the real account or I’m actually doing well? When is the right time to move to the real account?
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Kate’s response
Did you ever play the ASX Sharemarket Game in your high school commerce class? If so, you’ll have already been exposed to a form of “paper trading”. If you only heard about it after high school like me, here’s the rundown on how it works.
The game runs over 15 weeks and allows you to simulate a real life trading experience. You have the opportunity to invest $50,000 of virtual funds in the S&P/ASX200, a range of ETFs and a selection of small and mid-cap companies. To make the experience even more realistic, orders go through at live market prices when the market is open (10am till 4pm), and they’ll even charge you brokerage (so you get familiar with paying for it).
This game provides the first taste of investing for many students, and it could be something you might like try out.
What is paper trading?
Many new investors want to try before they buy when it comes to purchasing shares, and that makes complete sense. Paper trading is a way of simulating, buying and selling shares and ETFs, without using real money.
This gives you a chance to learn how the market works and practice investing, without spending a dollar.
Anyone can try their hand at the stock market, and your paper trading strategy could be as simple as writing down what stock you’d buy, the date and the purchase price. You can then record your sales and observe how your investment selections and strategy plays out over time.
You can also use online platforms to practice paper trading, like the ASX Sharemarket Game, INSERT and demo accounts offered by brokers which I’ll discuss shortly.
Difference between trading and investing
In the share market, an “investor” is someone who focuses on the business first. When analysing the business, investors consider things like:
- Revenue or sales
- Profit
- Cash in the bank
- Dividends
An investor is long-term focused, typically aiming to buy and hold shares in the company for 3 to 5 years.
In contrast, a share “trader” is typically short-term focused. For example, a “day trader” will often buy or sell the same share on the same day (hence the term “day” trader).
Share traders focus on the price (i.e. share price) and volume (i.e. number of shares traded) to make their trades. They may also use something called “charting”.
Investing typically requires less time, effort and has lower fees and costs than trading. However, many people believe their trading strategy is a viable way to make money from the share market, and therefore, they will happily commit many hours each day or week pursuing them.
Demo accounts
Brokers often provide Demo accounts to get you comfortable trading on their platform, before transitioning you across to a real brokerage account. They’re usually offered by brokers who build their platform around high frequency trade volume, and usually have a greater array of products than your typical broker. This might include CFDs, options, warrants, cryptocurrency
Be aware that not all demo accounts truly represent reality! They do not always charge the fees (such as brokerage, FX and account keeping costs) that they would in real life, and they may make you feel more confident than you should be.
When to start investing with real money
Now here comes the big question – when do you start putting some skin in the game? It’s a big step to start investing with real money, because suddenly there is the real possibility that you could lose money.
Often when investors try paper trading they take bigger risks and are more comfortable with losses, than they would be in real life.
My suggestion, if you want to try paper trading before investing your money, would be to consider the following:
- Giving yourself a set start and end date for this experience (e.g. 6-month timeframe).
- Giving yourself a realistic starting amount (e.g. $10,000).
- Thinking about which market you want to invest in, to begin with (maybe you’ll just start with ASX 200 stocks).
- Are you investing in stocks, ETFs or a mixed approach?
- Think about what should happen if you don’t do well, are you going to try again with a different approach?
- What are you doing to improve your knowledge in the meantime? Are you listening to a podcast like The Australian Investors podcast or taking a free course on shares?
- Did you have enough time each week to devote to your strategy?
I think the most important time to start investing for real, is as soon as you feel relatively comfortable with the risks, product, timeframe, and the possibility of losing your money.
You can slowly build your confidence over time, by investing small amounts on a regular basis.
You’ll never know everything when it comes to investing, so it’s important not to sit on the sidelines for too long, missing out on the magic of compound interest.
