How to Invest Is Easy — Start by Paper Trading for Free

Advertisement

“How can I start investing?” This question seems to be submitted every week to editor@investorplace.com by folks looking for guidance on their retirement.

I tell everyone the same thing. It’s deceptively simple: Pay attention, paper trade, then open a brokerage account.

I am a firm believer in the Warren Buffett thesis of only buying companies you understand. If you’re a thoracic surgeon, maybe you have strong opinions on whether Thoratec (NASDAQ:THOR) or Heartware (NASDAQ:HTWR) will redefine heart transplants. But if you’re retired social studies teacher? Well, you might be better off looking at stocks more in your comfort zone.

So start there: Just follow companies that make sense to you, and companies that have news you find interesting. Peruse the fundamentals in Yahoo! Finance or Google Finance, surf the web regularly for news, and do other research that won’t cost you a dime.

Shameless plug: I’d also recommend visiting InvestorPlace.com regularly for tips! Of course, other sites like MarketWatch, TheStreet.com and the rest are worth a peek, too …

When you find five or 10 picks you like best, “paper trade” the picks. It’s simple, really — just act like you bought the stock at the current price with your current funds, but do so on a Post-It Note instead of a real brokerage account. If you really want to be honest, subtract $20 from your cost basis to account for any trading fees you’ll incur — a charitable estimate of $10 to buy and $10 to sell your shares.

Practical example: You like Stock A at $30.50 per share as one of your 10 picks. You have $10,000 to invest — meaning you will invest about $1,000 in each pick for a balanced portfolio. You will write down in your ledger: “Stock A: Bought 32 shares 1/26/12 at $30.50.”

Why? Well because $1,000 minus $20 in fees = $980. Then $980 divided by $30.50 = 32.13. You obviously can’t buy less than a single share, so you have to round down to 32.

Now just track the stock and see what you learn. Follow the news like you own the stock, and ask yourself if it’s a stock you want to keep holding or sell based on your research.

After you feel comfortable, then it’s time to do more research about building a diverse portfolio and thinking holistically about your investments. But the experience of trading on paper is crucial so you can understand what volatility and risk are like in real-world situations.

After that, open up a brokerage account and try the real deal.

The bottom line is that you have to learn by doing, and rather than make costly mistakes as a rookie investor the best way to do that is to practice by paper trading. You will learn valuable lessons without losing valuable retirement funds in the process.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2012/01/how-to-invest-paper-trading/.

©2024 InvestorPlace Media, LLC