Stock / Share Market
by 5paisa Research Team Last Updated: 2022-03-23T13:51:06+05:30
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Paper Trading: A Brief Overview

As a beginner in the world of stocks and trading, you must do thorough research to ensure that you encounter a worthily trading journey. Navigating through a rather fast-paced setting while learning about stocks can be daunting. This is why you must know the ins and outs of the stock market before you wish to invest. Lucky for you, one can do this through paper trading. Explore below everything you need to know what paper trading is and how it is essential for you to kickstart your stocks journey. 

What Exactly is Paper Trading?

Paper Trading refers to the comprehensive practice of trading in the stock market, given the environment is completely virtual and you don’t have to invest your actual money. This virtual environment is not the same as the actual stock market environment. Thus, all the trades that you will possibly make here will not impact the real stock market. 

Paper trading, in a nutshell, replicates the real-world price movements and values of stocks, thereby letting you trade using money virtually. It thus lets you briefly determine and evaluate your trading strategies so that you can eliminate the possibilities of failure in a real-world setting, without having to put any of your money at risk. 

Paper trading is a distinctive term that first came into existence when trading was held physically at actual exchanges and not electronic platforms. Investors and traders simultaneously practiced their trading strategies on paper to improve their profits. This was done by comparing the trading ideas with price movements of the respective stocks in each trading session. 

Benefits of Paper Trading

Now that you’re well aware of what is paper trading, explore below some of the prime benefits that it offers investors and traders. 

Limits Risk 

One of the biggest perks and the ultimate game-changer or paper trading is that it helps investors eliminate the risk altogether. Paper trading only involves virtual money. Due to this, you aren’t required to put in your hard-earned cash at stake for holding practice trades. Investors can thus not only make well-versed trading decisions but can boost their confidence. If there is no threat to your money, bad trades aren't necessarily failures but something that you can learn and introspect from. It is as simple as practicing your moves until you are confident to invest in the real setting. 

Lowers Stress 

Another considerate benefit of paper trading is that it largely impacts your stress levels but in a positive way. As a beginner in the industry of the stock market, it is only obvious that you will feel extremely stressed and daunted. Paper trading helps you determine trades that may not work in your favor, thereby eliminating your stress levels. You can thus trade in a much more calm and composed state of mine. 

Practice and Learn 

Paper trading is one of the most excellent and smart ways of testing new strategies and setups. Whether you are a beginner or have some expertise under your belt, you can always test the reliability of a new strategy that you may have stumbled across. You can avoid risking capital and choose to paper trade for a month or two. 

Gain Optimum Experience 

Beginners can get an edge over their trading journey by paper trading. As a newbie, you must learn how to balance elements like scanning trading opportunities, determining the right strategy for you, entering orders, regulating winning trades, limiting losses, and so on. There is no better way of doing so than paper trading. Paper trading lets new investors and traders understand every small aspect of how to trade correctly. They further get screen-time and experience of understanding and viewing the market. Investors can thus use this to their advantage and get feedback on how efficiently they can execute their strategy. 

Bottom Line 

Paper trading offers a myriad of opportunities to traders and investors; one of the vital ones being- improving your trading skills. Nonetheless, it is extremely important to stay realistic and stick to goals that are practical. Investors must ensure looking into the following three elements while paper trading. 

  • Can the trade hit stop-loss? 
  • Can you get filled at your respective limit order? 
  • Can you view the setup in time? 

This was everything you needed to know about what paper trading is all about. If in case you ever get under-confident about trading, you can always opt for paper trading to gain back the confidence. Learn about this concept thoroughly to develop essential skills to make successful trades in the stock market.

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