Paper Trade

AAA

DEFINITION of 'Paper Trade'

Using simulated trading to practice buying and selling securities without actual money being involved. While a paper trade can be done by simply keeping track of hypothetical trading positions, it usually involves the use of a stock market simulator that has the look and feel of an actual stock market where budding investors can hone their trading skills. The proliferation of online trading platforms has made it easy to practice paper trading without committing actual capital. Another benefit of a paper trade is that it can be used to test a new investment strategy before putting new money into it.

INVESTOPEDIA EXPLAINS 'Paper Trade'

To derive the most benefit from paper trading, it should be taken seriously, with investment decisions made based on the same risk-return objectives, investment constraints and trading horizon as in real life. So, for example, if you are a risk-averse individual, it would make little sense to paper trade like a day trader and make dozens of very short-term trades.

Paper trading may also give novice investors or traders the impression that trading is quite easy, and lull them into a false sense of security. This is because paper trading does not involve putting one’s hard-earned money on the line. As a result, basic investment strategies such as buying low and selling high – which are quite difficult to adhere to in real life – appear relatively easy to make while paper trading. The first lesson of paper trading, therefore, is that while it is a great practice tool, it is very different from actual trading with real money.

RELATED TERMS
  1. Trading Rut

    A period of investing during which a trader fails to earn profits ...
  2. Investor

    Any person who commits capital with the expectation of financial ...
  3. Closed To New Investors

    Mutual funds and hedge funds that do not accept investments from ...
  4. Activist Investor

    An individual or group that purchases large numbers of a public ...
  5. 500 Investor Rule

    A SEC stipulation requiring a company that exceeds 500 individual ...
  6. Prudent Investor Rule

    A guideline that requires a fiduciary to invest trust assets ...
Related Articles
  1. Investing Basics

    Stock Market Simulators: Play Your Way To Profits

    Online stock simulators make learning about stocks as fun and easy as playing a game.
  2. Investing Basics

    Investing With A Purpose

    Your reasons for investing are bound to change as you go through the ups and downs of life. Setting goals is the first step in determining which investment vehicles are right for you.
  3. Trading Strategies

    How To Outperform The Market

    Active trading is an investing style that aims to beat the market. Find out how it works, and whether it will work for you.
  4. Investing Basics

    Does Active Value Investing Pay Off?

    Learn about a recently published paper that explores why active value investors underperform.
  5. Trading Systems & Software

    Backtesting: Interpreting The Past

    We offer some tips on this process that can help refine your current trading strategies.
  6. Trading Systems & Software

    Backtesting And Forward Testing: The Importance Of Correlation

    Correlations between backtesting and forward performance testing results can help you optimize your trading system.
  7. Trading Systems & Software

    Trading Systems: Run With The Herd Or Be A Lone Wolf?

    Find out if taking the path less traveled will work in your favor - or against it.
  8. Active Trading Fundamentals

    Stimulate Your Skills With Simulated Trading

    Think you can beat the Street? We'll show you how to test your abilities without losing your shirt.
  9. Options & Futures

    Investing 101: A Tutorial For Beginner Investors

    Do want to invest, but don't know how to begin? We'll show you the building blocks you need to get started.
  10. Trading Strategies

    Simulator How-To Guide

    A stock simulator allows you to use fake money on real stocks. Learn how to buy a stock watch the result.

You May Also Like

Hot Definitions
  1. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  3. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  4. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  5. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  6. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
Trading Center