How to Paper-Trade Penny Stocks
Penny stocks are stocks that tend to be inexpensive---usually only a few dollars per share. Investing in penny stocks is an excellent way to break into the stock market. However, it's a good idea to get some investment practice before your money is actually on the line. This is where paper trading comes in. Paper trading is imaginary investing---keeping track of what your losses and and gains would be if you invested in certain stocks over a certain period of time. In fact, the only difference between full-fledged paper trading and actual investment is the money involved.
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Instructions
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Decide how much money you're going to start out with. If you're planning on eventually investing for real, try starting out with an imaginary sum five to 10 times the amount you will actually have to invest. This gives you the chance to diversify while still remaining fairly realistic.
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Determine the other parameters of your investment: the time frame involved; criteria for stock purchases; any self-imposed trading rules; and your methods for monitoring stocks, recording transaction prices and keeping track of your entire paper trading exercise. Since you're paper-trading penny stocks, you will have to decide to limit your investments to stocks that fit within a specific, albeit flexible, definition.
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Keep extensive notes on your trades. You can do it all on actual paper or by using a spreadsheet on your computer. You might also want to use an online stock simulator, such as the one available at Investopedia (see References). This will automate all transactions and keep track of your gains and losses, but you still might need to record some data manually.
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References
- Photo Credit penny graph image by RT from Fotolia.com
