Paper trading lets you learn to navigate the stock market without putting any real money at risk. When you make paper trades, you choose stocks to follow. You may "buy" the stocks at one price and "sell" them at another. The traditional way of making paper trades requires that you record your purchases and sales on a spreadsheet or piece of paper. Many online trading companies now allow you to set up virtual trades. When picking your stock portfolio for paper trading, it is important that you choose stocks you would consider buying in an actual trade.
1. Choose a diverse group of stocks in which to invest. The more diverse your stocks, the more likely you will be to make money trading, even with a fake paper trade. For example, if you choose to invest only in the automobile industry and the industry faces problems, you will lose considerable amounts of money. If your portfolio is well-rounded and you own shares in one or two car companies, you will be less affected by any problems. You also want to choose from a mix of growth stocks, blue chip stocks and speculative stocks. Blue chip stocks are those of well-established, high-profile companies, while growth stocks are those of newer companies. Speculative stocks are more risky, as their performance is not proven.
2. Look at the company's top and bottom lines, or the revenue and profit margin. Choose stocks that have increasing revenue, as that means they are likely to grow and make money for you over time. The bottom line, or profit margin, should also grow over time.
3. Determine the price-to-earnings ratio of each stock you are considering adding to your paper trading portfolio. When you look up a stock's quote, the price-to-earnings ratio — or P/E ratio — may be listed with the rest of the stock's information. The best value lies in stocks that have a low P/E ratio.
4. Record the name of the stocks you want to paper trade, either on paper or by creating an account at a virtual trading website. Keep an accurate record of each stock you add to your portfolio, including how much you paid for each share. If you decide to sell a stock, record the sale price and how much you ended up losing or earning.
- Although you are not using real money when paper trading, it is not the time to make wild investments you wouldn't consider in real life. Choose an amount of money you can comfortably afford to invest in real life when making paper trades.
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