The term "paper trading" refers to the days when new traders would practice their stock market skills by creating a paper ledger or writing down imaginary trades in a notebook. You can do this electronically today. You pretend you have invested money in specific stocks and follow the progress of those stocks to see how well you would've done. This prepares you for real-world trading by showing you the strengths and weaknesses of your strategies.
Choose a Financial Website
Free financial websites such as, Google Finance, Yahoo Finance and USA Today allow you to set up a portfolio without actually buying the stock. These sites provide research you can use to hone your stock choices. You can also screen for stocks based on your preferences such as value stocks, dividend-paying stocks, growth stocks, those that have hit new lows and those that have hit new highs. You can read financial reports and analysts' projections on each stock you're interested in. Once you've made your selections, you can add them to a portfolio and watch the stock prices change on a daily basis. These are actual stocks trading on the market that you will be watching.
Assign a Dollar Amount to Your Portfolio
Imagine a dollar amount for your paper-trading portfolio. This is important because you want to grow the value of your imaginary investment by choosing stocks that go up in value. At the end of a set period, such as three months or six months, you'll need to compare your ending value with the beginning value. If you don't do this, you won't have a clear picture of how successful your trading has been.
Establish Firm Rules
It's easy to fudge when recording your buys and sells. For example, if a stock tanks the day after you buy it, you may be tempted to erase the trade as if it never happened. Create a set of rules for recording buy and sell orders and stick to those rules. In addition, decide upon a dollar amount you will pretend to invest in each stock and stick to that decision. This will allow you to see how each stock pick contributes to the success of your strategy.
Subtract Brokerage Fees
When calculating your profits and losses, deduct any fees you would've paid to a broker. For an online broker, this can range from 4 dollars to 15 dollars per trade. A traditional broker will charge a percentage of the value of each trade. You can call a broker and ask what their fees are to determine what you should deduct. Keep in mind that you pay for both buying and selling, so it costs you to get into a stock and to get out of it.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.