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This is a level 1 question.
What is paper trading?
Paper trading simply involves keeping a record on paper of buy and sell transactions, rather than committing real dollars to trading. If you like a particular stock, just jot down its current market price as if you purchased the stock at that price. Then, follow the stock's price action in the coming weeks and months. When you decide to sell, jot down the selling price. From there, you can determine the return on your paper investment.
Paper trading allows you to practice analyzing stocks and options without risking investment funds while you are still learning. The Wall Street Journal and most local newspapers offer stock listings.
For options, you can gather information from our Options Montage. We recommend that you choose options on the following:
- Your favorite optionable stock – one you think you know better than all others.
- The current hot stock that you are seeing touted in the press. Perhaps it's a company on a major magazine cover. It might be the current darling of a major business news channel. Maybe it's one of the fast-moving Internet or technology stocks.
- A so-called "dog" stock that you think is only going to go down (if you want to add a put into the mix).
You should then copy down the following information about the option(s) that you will be paper trading: stock pick, ticker symbol, expiration month, desired strike price, call or put, option symbol, current option price, and current stock price. Before gathering this information, though, you should learn more about options trading by checking out the Getting Started section of our website's Education tab.
Once you have all this information compiled, consider yourself in your first option trades. Keep in mind that if you had real money on these trades, you would want to keep a close eye on them every day. This diligence should be practiced in these risk-free paper trades. Along with learning something about option price fluctuations, time decay, and so forth, you will also gain an understanding of the importance of diligent position monitoring.
Thank you for your question, and best wishes in your paper trading!
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Question Level Key
Level One--Basic Jargon, Definitions, Basic Mechanics of Trading.
Level Two--Introductory Points, Practical Points and Simple Strategies
Level Three--More Advanced Strategies and Repairs
Level Four--Risk Management, Psychology, and How Best to Evaluate Things.
Level Five--High end questions concerning Portfolio Analysis, Managing a Portfolio
of Options, Option Pricing Models, and Nuances of Trading. Included could be a variety of
other topics.
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Do you have questions about options trading?
We've got answers.The idea here is that you submit any questions you have
regarding options trading, and each trading day we will select one question to answer from
all those submitted. Then, we'll archive each question we answer so that over time,
the Q&A Archive will grow into an extensive library of educational material.
The key component to this equation is that we need your questions. They can be as
simple or as complex as you like, and we will try to answer a fair sampling on both ends
of that spectrum.
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