is a simulated trading process in which would-be investors can 'practice' investing
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
without committing real money.
This is done by the manipulation of imaginary money and investment positions that behave in a manner similar to the real markets. Before the widespread use of online trading for the general public, paper trading was considered too difficult by many new investors. Now that computers do most of the calculations, new investors can practice making (losing) fortunes time and time again before actually committing financially. Investors also use paper trading to test new and different investment strategies. Stock market games are often used for educational purposes.
For example, investors can create several different positions simultaneously to compare the performance and payoff characteristics between multiple strategies. A textbook may state that writing a covered call
A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities. If a trader buys the underlying instrument at the same time as he sells the call, the strategy is often...
is synthetically the same as writing a naked put
A naked put is a put option where the option writer does not have a position in the underlying stock or other instrument. This strategy is best used by investors who want to accumulate a position in the underlying stock - but only if the price is low enough...
, but in practice there are subtle differences. With a paper trading account, an investor can set up a bull credit spread and a bull debit spread simultaneously and watch how the payoff for each position changes as the market moves.
Other advanced strategies include leverage, short-selling, forex and derivatives trading. Successful execution and profit generation from these strategies usually require high levels of technical knowledge. Investors can test these strategies with paper trading to avoid taking on excessive risk due to inexperience.
Various companies and online trading simulation tools offer paper trading services, some free, others with charges, that allow investors to try out various strategies (some stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
ages allow 14-day 'demo accounts'), or paper trading can be carried out simply by noting down fees and recording the value of investments over time.
The imaginary money of paper trading is sometimes also called "paper money," "virtual money," and "Monopoly
Marvin Gardens, the leading yellow property on the board shown, is actually a misspelling of the original location name, Marven Gardens. The misspelling was said to be introduced by Charles Todd and passed on when his home-made Monopoly board was copied by Charles Darrow and thence to Parker...