by Jeff Reeves | November 5, 2013 12:06 pm
Paper trading is the perfect way for young investors — especially skittish ones — to dip a toe unfamiliar market waters.
What exactly is paper trading?
Well, look at it this way: Football season is in full swing, and along with it, so are fantasy football leagues. All over the country, football fans are researching quantitative and qualitative stats for their upcoming matches, from a player’s statistical history to how the player performs in bad weather.
Paper trading is pretty similar. Well, except for the beer-drinking, screaming at the screen and trash-talking … depending on your personal investing style.
See, with paper trading, you can create your own “fantasy” portfolio of stocks before putting down real money on an idea. Real world experience is the best teacher, but you don’t have to put your nest egg at risk when paper trading. It’s a good way to learn how to research and pick stocks.
Though online paper trading platforms exist, learning to invest with paper trading doesn’t have to be complicated.
Here are a few steps to start paper trading today:
Write a fixed sum of money down on a piece of paper. I recommend starting with a round number like $50,000, even if your nest egg is significantly smaller. It makes this exercise easier.
Write down the names of the stocks you’re thinking of investing in. You can stick to one stock if you want, but the exercise is much more educational if you use multiple picks. Heck, maybe even pick a stock you expect to crash just to see the results — it’s only paper money, after all.
Write down the current stock prices next to each name. You can’t invest exactly $1,000 in the stock market any sooner than you can buy exactly $100 worth of clothes at the mall. You are buying a finite number of shares at a set price based on current market conditions.
Divide your total investing cash by the number of stocks. Again, for ease of use I recommend round numbers. For instance, five stocks if you use $50,000 — meaning you have $10,000 per investment.
Subtract $20 from that figure. Most brokerage accounts charge a nominal fee per trade — for both stock purchases and stock sales. To pay even $10 per trade (once to buy and once to sell, for $20 total) is pretty steep, but it allows you to be more realistic with your “cost basis” by baking in a worst-case scenario fee to actually buy and sell your pick.
Divide that per-investment figure by the actual share price, rounding down. Remember: You can’t buy half a stock, so no 150.32 shares allowed.
Now just track your investments by checking the stock price every day after the closing bell (4:00 p.m. ET) to see how you did!
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Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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