Paper Trading Account

Curious about paper trading? You'll find everything you need to know about paper trading accounts in this detailed guide. Keep reading to learn more.

Paper trading is an excellent way to build your confidence as an investor. You can test strategies without the risk of losing cash and get comfortable with a platform's tools.

But which paper trading account is best?

In this guide, get a closer look at the best platforms for paper trading stocks, options, and futures. Plus, learn how it works and the downsides of paper trading.

What is Paper Trading?

Paper trading is the practice of trading virtual money on a simulated version of the stock market. It's a helpful technique for anyone new to the stock market, as it provides an opportunity to "trade" without the risk.

Here's how you might benefit from a paper trading account:

• Understand the market better: By recording trades and tracking open positions, you can get a deeper understanding of the market than you would simply by reading books or listening to lectures.

• Get used to experiencing gains and losses: Of course, the emotions involved in trading with a paper account aren't exactly the same as if real money was involved - but it's still good practice.

• Get familiar with a specific sector or asset class: Try paper trading stocks, options, futures, or even crypto and Forex. Many beginners paper trade stocks first, while more experienced traders may be interested in paper trading options or futures.

Many platforms offer free paper trading accounts. We'll take a look at some of the best ones further down. But for now, let's take a look at some of the different types of paper trading.

How to Paper Trade Stocks

Many stock market simulators will give you $100,000 in virtual money to start out with. Then, it's up to you to make smart investments and build a healthy investment portfolio.

Paper trading stocks will give you a better sense of how the market behaves from day-to-day. You'll see how major stock indexes, such as the S&P 500, the Dow, and the Russell 2000, and different business sectors, like tech, agriculture, or entertainment, respond to the news.

You'll also learn to weather the frequent rise and fall of stocks, which can be stressful for some investors.

Where Can I Paper Trade Stocks?
A number of popular stocks paper trading platforms exist. Some of the most popular include:

• eToro: eToro Demo Account
  
• Tradestation: TradeStation Simulated Trading
  
• E*Trade: Power E*TRADE Paper Trading
  
• TD Ameritrade: Thinkorswim's paperMoney
  
• Interactive Brokers: Interactive Brokers Paper Trading Account
  
• Webull: Webull Paper Trading Account

How to Paper Trade Options

Trading options is a bit more complicated than trading regular stocks, so paper trading options is an ideal way to learn the ropes.

One advantage of options trading is that it carries potentially lower risk than stock trading since you can withdraw at any time. However, unlike stocks, they don't represent ownership in a company. Instead, they're part of an asset class known as derivatives because their value is derived from something else.

When you open an option contract, you pay a fee known as a premium to lock in the price until the contract expires.

You have to pay the premium regardless of whether you choose to exercise the option contract or not, and this is one cost you can avoid through learning via option paper trading.

When trading options, you can buy and sell calls and puts.

There is also potentially substantial risk involved in options trading, where you could lose large sums of money, especially for those selling calls and puts. That's another reason why practicing with a paper trading account is a good idea.

Where Can I Paper Trade Options?
A number of popular options paper trading platforms exist. Some of the most popular include:

• Tradestation: TradeStation Simulated Trading
  
• Tradezero: Tradezero Demo Account
  
• TD Ameritrade: Thinkorswim's paperMoney
  
• Interactive Brokers: Interactive Brokers Paper Trading Account
  
• Tradier: TradeHawk FREE Paper Trading Account

Paper Trade Futures

Futures are similar to options in many ways. However, while options contracts don't obligate the investor to buy or sell the underlying asset, futures contracts do.

A futures contract requires that the asset in question be bought or sold at a set price at a later date. It's often used to hedge against dramatic price changes of commodities.

Futures were initially created for institutional buyers who intended to purchase and take possession of the commodities the futures represented. But it's also possible for retail investors to use futures to speculate on the future price of the commodity to profit.

Where Can I Paper Trade Futures?
A number of popular futures paper trading platforms exist. Some of the most popular include:

• Tradestation: TradeStation Simulated Trading
  
• E*Trade: Power E*TRADE Paper Trading
  
• TD Ameritrade: Thinkorswim's paperMoney
  
• Interactive Brokers: Interactive Brokers Paper Trading Account

Are There any Downsides to Paper Trading?

One of the biggest dangers of paper trading is that you'll give yourself a poor impression of how you'd invest in the real stock market.

When you invest with virtual money, there is no real risk, which makes many paper traders inclined to make reckless investments that they might not if they were using real money.

If you see wild profits from your risky trading habits, you may try to implement them out in the real world and find yourself losing more money than you can afford.

In other words, paper trading accounts have the potential to create or reinforce dangerous investing habits that people might not develop otherwise.

While it's fine to make risky choices in a paper trading account for the purposes of learning or experimentation, try to be mindful of how these investments would affect you in the real world.

Bottom Line

You can get a better understanding of trading by working with a paper trading account, and there are several popular platforms that offer the service.

If you already have a broker, make sure to check with them to see if they have a demo account for you to try. You'll likely benefit the most from experimenting with a platform you intend to use.

Keep in mind that paper trading can give you a false sense of security when it comes to trading on the real market. Always endeavor not to let your risk-taking behavior in a demo account lead you to take too many risks with your own money.