Clients often ask me why I tell them to go and practice using a stock market simulator before jumping right in to the action on the real stock market. Whilst I have my own reasons for particular clients, I think the prevalence of virtual stock markets speaks for itself, as something that the general trading public wants to have.
The main draw of a virtual stock market is obvious. You don’t have to spend your own money to participate and see if your strategies pay off. The better stock market simulators are accurate, updated regularly and follow the same patterns as the real market. The closer the virtual stock markets are to the real market, the more you can learn from them.
Virtual stock markets are useful for everyone, not just green stock traders who haven’t traded before. I often rehearse my trades on the virtual stock markets before making them and I can also try different strategies on them to see which is more profitable in the long run. In addition to this, the better virtual stock markets support options and futures and this means I can test a strategy for these types of stocks as well.
There is no loss in losing your money on the virtual stock market, yet there is plenty to gain from doing so. Seeing how you react to losing your money on the virtual stock market allows you to avoid the mistakes when you start trading with real money in the future. Using a virtual stock market is somewhat akin to getting a look at how you will react and deal with the market’s idiosyncrasies.
If you have other stock trader friends, you can set up a competition, comparing your virtual stock portfolio and theirs to see who is the better investor, without the possibility of ruining your real life portfolio. Using an online stock trade simulator allows you to teach and show someone who is not comfortable with dealing with money how the market works and allows you to show them without any risk to your funds or theirs. Investing money is a cornerstone of today’s society and everyone should have a working understanding of how to invest and why to invest. The virtual stock simulators provide the hands on experience necessary to learn the ropes of the stock market.
Learning via a game is a proven way to make sure things stick and you can use virtual markets in conjunction with classroom economic study to help students learn how everything works. One university professor I know sets up his own Investopedia games based on the work he has set in the last month and gives out a prize for the student with the best portfolio at the end of the month.
For those who are reckless, online stock trading simulators are an area where they can find out what happens when you charge in without doing their research leads to losing large amounts of money in short periods of times. Whilst I like to get my clients to work with the virtual stocks, I don’t stop them from investing in the real stock market simultaneously, I just get them to make sure their decisions are based on knowledge and not guesswork. If the clients isn’t sure what to do, adding the stocks to their virtual portfolio is an educational experience. It doesn’t matter whether the stocks in a virtual portfolio rise or fall as you are looking at the virtual market from an educational point of view, not a financial point of view. I highly recommend that everyone who is even slightly interested in the stock market opens an account with Investopedia or a different virtual stock market to start their virtual trading career as this may give them the confidence to use the real stock market in the future.
If these virtual stock markets existed fifty years ago, I would bet that some of the worse financial crashes would not have happened. The proliferation of financial knowledge gained from the simulators is highly valuable and I believe that all students should get the change to use one of these simulators before they leave school. Financial knowledge and foresight should not be avoided and even if you are a confident stock trader, there is always something knew that you could learn about a different trading strategy or your own trading style.