An Idea for Beginner Investors

So, you are new to investing, you believe you have found a great stock, you have analyzed the devil out of it, and now you feel you are ready to make the plunge.

Well…don’t! At least not yet. Test the waters first by making a “paper trade,” and do it without spending a dime.

Trading with Imaginary Money

At first, simply record the number of shares you want "to buy," the date when you "bought" them and the asking price you "got" at the time. Then, calculate the gross amount and reduce it by the approximate commission costs to arrive at your "net proceeds." Then enter all this data into a spreadsheet on your computer, or into a notebook if you are an old-fashioned type of person, and you will have completed the first leg of your journey into trading with imaginary money.

Next comes the wait, and that may very well be the hardest part of the exercise. What you have to do now is to watch how your paper trade(s) performs in the real world. If your paper trade is "losing" money, you are likely to feel quite good about yourself for not jumping the gun. All you will have lost is a bit of time needed to put everything together.

However, investing with imaginary money becomes exponentially more difficult if your paper trade starts "performing" really well. You may be saying to yourself how you may have missed out on a profitable opportunity by being afraid. But think about it, is it really so? After all, there is plenty of fish in the sea, to use a cliché yet again. Don’t worry, you are just a beginner and there will be plenty of time to explore other potentially profitable trades.

Benefits of Paper Trading

Remember when we said that if the market moved against you, all you would have lost is a little bit of time putting your paper trade together? Well, in terms of self-educating yourself for free, that “lost time” could actually be priceless.

In essence, by exercising a bit of common sense and a lot more patience, you have started learning the basics of investing, including picking and monitoring stocks and their market performances, deciding your entry and exit prices, and developing your own investment style and corresponding strategies. By practicing paper trading, you can test and refine your trading strategies, as well as verify how good your sources of financial information are.

If your paper trades are making money, you are learning how to uncover accumulation or sale opportunities. If you keep hitting the brick wall, you are still in a very comfortable position of having the time and peace of mind to find out why. Also, don’t forget, money can be made in rising and falling markets. It just makes so much more sense to learn how to do it properly and the easy way!

Creating a Practice Portfolio

There is a number of resources on the Internet that can help you create your paper trading portfolio. But you can do it yourself too. Create a spreadsheet in which you will be able to enter stock symbols, entry and exit dates and prices, number of shares purchased and sold, transaction costs, percentage returns and corresponding dollar figures. Running your totals after each trade will give you a good idea how well, or not, your paper portfolio is doing.

An important part of the exercise is to establish the time frame; meaning, how long you might need to practice trading before you feel confident enough to try out the real thing. Of course, no one is suggesting you should be doing this for any specific period of time. That decision rests with you.

However, if you see your paper trading strategies paying off more often than not, then perhaps it might be time for your ideas to take monetary form. Please remember, start out small, just in case. Complacency and feeling overly confident are the most common reasons why beginner investors lose money in the financial markets.

First, Put It All on Paper

Print Article

Email Article

View All Articles

How to subscribe to feeds