Stock Market Simulators Can Help Investors Learn the Ropes. Here Are Some of the Best

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With the constant ups and downs and complicated inner workings of the stock market, it’s easy for new investors to feel intimidated. But there’s a free way to get some practice before you start investing for real —  through paper trading, also known as a stock market simulator.

“I started out with a stock simulator when I was learning how to invest,” says Kevin Matthews II, a former investment adviser and the author of “Starting Point: How to Build Wealth That Lasts.” “I started with $100,000 and chose different stocks. After a few months, I could see how I did,” he says.

If you’re not sure how to get started as an investor, and you want to learn the ropes before you put in your money, paper trading can be a way to build confidence before you risk your first dollar. 

But don’t get so caught up in imaginary trading that you forget to start investing for real. Ultimately, the best way to build wealth with investing is not through any special tricks or fancy tools, but to invest in a diversified portfolio of index funds and let time in the market do the work.  Here’s what to know.

What Is Paper Trading?

Paper trading is a way to simulate returns in the stock market without buying or selling investments for real. Some brokers offer demo accounts, says Stacy Johnson, CPA, a former stockbroker and the host of the Money! podcast. They provide you with a dollar amount you can practice with, placing “trades” on the platform and then seeing how your picks would have performed on the real market. 

“Paper trading lets you make choices and then follow the market performance of those choices to see how things play out,” Johnson says. “You can try out different strategies or even pick different companies and get an idea of how they might perform,” he explains.

In other words, you can think of paper trading like the stock market equivalent of a fantasy football league. You don’t put real money in and you don’t actually own the investments in your paper trading portfolio, but you can see how this hypothetical portfolio would perform in real market conditions. 

Why Should You Practice Investing?

When you’re not entirely sure that you’re ready to invest, or if you don’t feel like you know enough, paper trading can provide you with a measure of confidence before you begin using your own money, Matthews explains. Additionally, you can try out new strategies and ideas ahead of time — before you commit real dollars.

“For me, paper trading was really helpful to see how things move, and how the market works. It really helped me develop a realistic look at the stock market and what types of returns I’d get,” says Matthews. 

While paper trading is a great way to understand the intricacies of the stock market for those who are curious, it’s important to remember that you don’t need to try to time the market or pick specific stocks to start investing. Experts recommend buying and holding a diversified portfolio of index funds and exchange-traded funds (ETFs), which are low-cost, low-risk, and allow you to easily invest in many different stocks at once.

Johnson says paper trading can also help you get used to using an investment platform. When you buy and sell stocks, there’s a learning curve involved. A demo account or stock simulator can help you become familiar with the process of searching for stocks and placing different types of orders. 

When you’re ready to begin investing, you’ll know how the process works, and you’ll have more confidence in your ability to make decisions for your portfolio. Paper trading can help you get used to the idea of investing and eventually take the plunge and start investing for real.

Pro Tip

When you’re ready to start investing, consider choosing an index fund with a low expense ratio to start off with while you learn more about individual stocks.

Drawbacks of Paper Trading

Even though you can use paper trading to practice stock investing, there are some pitfalls to watch out for. 

“You can learn a lot from paper trading, but it’s important to know that it’s not exactly the same as trading in real life,” Johnson says. “Sometimes you do well in the stock simulator, but in real life it doesn’t play out the way you expected,” he explains.

Additionally, many apps and trading platforms use terms like “investing game” to advertise themselves. Paper trading accounts and demo accounts can feel like a game, and you might take bigger risks than you would otherwise, Johnson warns. 

“With a demo account, it feels like a game, and once you start using real money, it’s no longer a game,” Johnson says. “You can take big risks and make poor choices with a demo account and not suffer the consequences. You can’t treat your real money that way,” he adds.

Another issue with paper trading accounts, Matthews points out, is that it’s not real. You might feel good about how well you perform with your stock simulator, but you’re not actually making any money or building wealth for the future.

“If you do well in paper trading, it’s not your money,” Matthews says. “You’re like, ‘I could have made this much money,’ but it wasn’t real, so you didn’t.” 

Don’t get so caught up in your fake performance that you forget to begin investing for real.

Best Paper Trading Platforms

Some brokers offer demo accounts and stock simulators so you can practice investing before you begin using your own money. Here are some of the best paper trading platforms to help you learn the basics without putting your money on the line.

paperMoney by TD Ameritrade

Part of the thinkorswim platform and suite of investing tools from TD Ameritrade, paperMoney can help you learn about how to find stocks and execute trades. TD Ameritrade offers one of the most robust investing platforms, so using their stock simulator to get an idea of how to choose stocks and make trades can be a good way to familiarize yourself with using an advanced platform. And, once you’re ready to transition to real stocks, TD Ameritrade ranks among NextAdvisor’s top picks for the best online stock brokers

Although TD Ameritrade offers most of the major investment classes, the brokerage doesn’t offer access to cryptocurrencies or fractional shares of stocks.

E*TRADE

E*TRADE offers paper trading through its Power E*TRADE platform, which also features other tools geared towards advanced investors. All customers with an E*TRADE account have free access to these tools. 

In addition to offering a demo account, E*TRADE also has a range of pre-built portfolios, so you can have the professionals help get you started. For some investors, it can make sense to get started with pre-built portfolios and practice investing, and then graduate to the more advanced platform after building confidence.

eToro

eToro offers a “virtual portfolio” that you can practice with while learning the basics of investing in cryptocurrencies. As of this writing, eToro is only available for cryptocurrency trading in the United States, although investors in other countries have had access to other assets, including stocks and forex trading, since 2007.  

In addition to providing access to about 20 cryptocurrency choices, eToro also has a social trading feature that allows you to learn from and copy the trades of professional traders.

Howthemarketworks.com

Unlike the other paper trading platforms, which are all associated with online brokerages that offer real investing, this free simulator is meant solely for paper trading. 

You can experiment with a simulated portfolio or learn the basics of investing through the collection of educational resources on the site. You can even enter into contests and see how your hypothetical portfolio stacks up against those of other would-be investors. However, it’s important to note that you aren’t truly investing, so eventually you’ll want to move on to a brokerage and start creating a real portfolio.

How to Start Investing for Real

Johnson recommends that new investors start out with index funds and ETFs. Even if you use a stock simulator to find new ideas or try different strategies, you can get started with index products so that you can start building wealth without waiting to learn about choosing individual stocks.

“You don’t have to worry about picking the wrong stock or what happens if one company tanks when you use index funds or ETFs,” Johnson says. “As you learn more about investing, you might be able to choose individual stocks and make a profit.” 

That doesn’t mean you should start day trading, though. Even once you begin investing in individual stocks, Johnson warns against frequent trading. Instead, he suggests learning about what makes a good long-term stock and choosing companies that are likely to have staying power and result in gains over time.

Matthews suggests using a schedule with your paper trading account and creating a deadline for switching to real investing, such as beginning to invest after a month or a quarter. He recommends going no more than a quarter with a demo account before actually starting to invest.

“As long as you have a solid savings account, and you have a separate emergency fund, get started. I don’t care if you have five dollars or a hundred dollars, invest it,” Matthews says. “Be consistent with it. If you have ten dollars a week, start with that. Then you can increase as your situation allows. Make that progress, no matter how small, and then build from there.”