Paper Trading: What It Is and How It Works

There’s nothing wrong with a little friendly investing competition. Especially when none of your actual money is on the line.

What is paper trading?

Paper trading is a way for people to learn how to buy and sell stocks without using real money. Investors use stock market simulators, and the people who generate the highest stock market returns are technically the “winners.” Except there are no losers here — the money used isn't real, so there’s no risk. But what’s best about paper trading is the invaluable experience it provides new investors. Anyone can get their feet wet in a simulator before diving head first into the real stock market, where real money is at stake.

Can you make money paper trading? No, because the money isn't real. But is paper trading a good way to learn? Absolutely, yes, says, Tela Holcomb, creator of Trade Your 9 to 5, a program that teaches people how to trade and invest.

“I always recommend people start with paper trading,” says Holcomb, who's based in Las Vegas. "We have all of our clients start with it mostly because everyone who comes to us is brand new to the market and it can be scary."

For example, she says, if you're the first generation in your family to make enough money to invest, the fear of losing everything you worked for is real. She says stock market simulators allow you to start learning the market with "Monopoly money," which removes some of that fear.

» Want a leg up on the competition? Read all about how to buy stocks

Why use a stock market simulator?

In the real world, investors aren’t competing against other players’ returns. “Winning” is about equaling or exceeding the performance of a benchmark index.

For example, if you’re picking and choosing individual stocks and after five years your average returns are less than the returns of the S&P 500, you may be better off investing in a low-cost index fund that tracks the S&P 500. However, if you manage to beat the index with your stock picks (mind you, research shows this is unlikely, even among professional investors), you could say you “outperformed” the stock market.

In the actual stock market, success isn’t determined over weeks or months, but years.

» Read more: How to begin (and survive) stock trading

4 reasons to try a stock simulator

1. You’ll get a general investing education. Many of these platforms offer a very real education in investing, with a library of articles, tutorials, demos and, at some brokers, the chance to interact with an online community available to answer technical and investing questions. "It allows you to learn what to look for when you’re trading," Holcomb says. You can learn how long you want to hold and when and how you sell stocks.

2. It’s a safe space to learn the mechanics of placing trades and building a portfolio. There’s a reason student drivers take the wheel for the first time in abandoned parking lots. The best place to make all the rookie investing mistakes, such as mistyping ticker symbols or misunderstanding order types, is wherever you can suffer the least financial damage. Holcomb says removing that worry that you're going to make a mistake and lose it all allows you to focus on your strategy.

3. You can test drive new investment strategies and types. Looking to expand your investing repertoire? Trying before you buy is especially important when venturing into new strategies, such as shorting stocks and trading options, and more sophisticated investing fare such as futures and commodities and foreign currencies (forex).

4. You’ll learn the importance of keeping emotions out of investing. As billionaire investor Warren Buffett says, one of the keys to being a successful investor is the ability to control the emotions that lead other investors astray. Even though investing decisions are less loaded when there’s no real money on the line, the brain doesn’t always fully absorb that concept — think haunted houses, roller coaster rides and scary movies. Using a stock market simulator will provide a preview of what emotions to expect when you encounter the real market's unavoidable ups and downs. "People will step out there much more confidently about putting their money to work,” Holcomb says.

» Looking for some fresh ideas? Read up on these stock market strategies for beginners

Where to find stock simulators

For a virtual-trading practice environment that's close to the real thing, you can’t get much better than the simulated investing platforms offered by actual working online brokerages.

These practice accounts typically mirror the broker’s working trading platform.

Most are free, although they may require you to set up an account. The best brokers give test drivers access to a fully functioning setup with the same tools that active customers use: watch lists, stock screens, research and live or slightly delayed data feeds.

» Learn more: How to open a brokerage account

What is the best paper trading site?

Of the online brokers that NerdWallet has reviewed, the following received 5 stars for their trading platform functionality and offer paper trading accounts. We've excluded paper trading accounts that are only a part of a limited demo version of the product. Note that some of the brokers below may require opening and funding an account before gaining access to the paper trading account.

• E*TRADE: E*TRADE Paper Trading

• TD Ameritrade: TD Ameritrade paperMoney Virtual Stock Market Simulator

• Interactive Brokers: Interactive Brokers Paper Trading Account

• TradeStation: TradeStation Simulated Trading

• Webull: Webull Paper Account