Paper trading (sometimes also called “virtual stock trading”) is a simulated trading process in which would-be investors can ‘practice’ investing 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 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
Paper trading is a fun and effective method for testing out your investment strategy in a simulated market environment.
It is also a great opportunity to learn more about investor behavior and market psychology including some of the most common investor fallacies such as:
Representatives Bias: The tendency to make decisions based upon stereotypes or former learning.
Overconfidence: The tendency for new investors to over-estimate their forecasting skills or ability.
Anchoring: The tendency to fix or adhere to a course of action once it has begun.
Gambler’s Fallacy: The tendency to believe a trend is due for a reversal despite probability.
Availability Bias: The tendency to emphasize the importance of easily obtainable information.