Where to Start, Part 2 – Open a ‘Paper Trading’ Account
Picking up from our last discussion on getting started, our next section covers Paper Trading.
The following steps should be followed:
- 1. Create a list of brokers
- Identify those that offer “Paper Trading” accounts
- Identify which products they offer
- Identify how and where they make their fees
- Check customer reviews and find out how good their service really is
- Speak to someone there or go and visit their office
- Pick one based that best fits your needs.
The first step to start your practice is to identify a reputable (good) broker. You can do this through word of mouth or a simple online search. Most large banks and financial institutions will offer a trading platform.
“Paper Trading” is basically practicing on a live trading platform with imaginary money. Most good brokerages will allow you to open a paper trading account on their platform as it allows you to learn how the platform works without making any costly mistakes. It also allows you, the client, to learn how to trade using real price movements and products. Find a broker that will allow you to trade on a paper account. Typically a paper account will follow real market price movements and will mirror the actual market prices to fill your orders.
Each broker will have a their own software ‘platform’ that they use. This platform will be your interface with the market. There are hundreds of platforms out there with some better than others. Identify which products they offer on their platform and make sure that you understand the products and risks associated with each product. We suggest not moving straight into leveraged products (leverage means that you are borrowing money from the broker to invest. 10-to-1 leverage means that for R100 invested with the broker, you can buy shares worth R1,000). Leverage can be incredibly good or bad if not used correctly. Any beginner trader should keep things simple and avoid leveraged products.
Understanding how you broker makes his money is also important for your own long-term success. These are some of the ways in which brokers make their money:
- Platform fees – a fee for using their platform
- Trading fees – a fee on each trade
- Date fees – a fee for providing you live market prices on the platform
- Account fee – a monthly/annual fee for having an account with them
- Spreads – a broker might add a spread to each trade. This means that if the market price for a stock is R10, you will buy it at say R10,50. The 50c being the brokers spread that they add on
- Research – some brokers will offer their own research to identify trading opportunities
Once you understand how the brokers make their money, it will be easier to identify which one is best suited to your needs.
Always speak to someone with experience or go online and search for reliable reviews on brokers before you sign up with one. Flashy websites can be very deceptive and always check out:
- Are they licensed – avoid any unlicensed brokers or you won’t see your money again
- Where are they licenced – Local brokers will be licensed with the FSB (Financial Services Board). Avoid brokers licensed in small far off tax havens like Cyprus or Bermuda. If you have an issue, there is little chance of you being able to speak to someone to sort it out.
- Where are their offices – if they operate out of a garage, then best avoid them and find a reputable bank instead.
- Can you speak to someone easily – phone their helpdesk and see for yourself what the customer service is like before you sign up.
Picking a broker is a bit like choosing a wife. They will know you financial details intimately and there you have to trust that they won’t run off with your money.
Once you’ve filtered through all these moving parts, pick a broker that will work well for you. This might change over time as you grow and develop your trading into new products and markets. Most professionals have a number of broker accounts, depending on which market and product they are trading.
Once you’ve got your paper trading account up and running, trade as you would for months before you move onto real money. Always remember that the psychological shift from a paper to real money account is huge and this aspect is often overlooked by beginners. It’s much easier to place those high risk trades with pretend money than it is with your own hard-earned cash.
Always keep practicing and keep your paper account active even after you move onto a real account. Put through trades in the paper account that you are unsure of and see what would have happened. Keep a journal of your trades, especially when you start. Always refer back to your trading journal when you exit and understand what you did right or wrong in the trade.
A paper account is an invaluable tool in developing your own trading style and strategy. Make full use of it!
Until next time…