Mock Stock Trading Doesn’t Prepare You For The Real Thing

Every so often, you will see a mock stock trading competition sponsored by a brokerage house, TV business program or financial magazine. The public is invited to select a mythical portfolio and the person that makes the most money over the allotted time wins money or some other prize.

What is a Stock Trading Simulator?

A stock trading simulator allows you to make paper transactions and follow the performance of the stock based on certain conditions being true. Some programs will allow you to enter different variables and then the computer will project the performance of the stock based on those conditions.

For instance, a change in interest rates can affect the price of a stock. Other external factors such as world politics and monetary policy can affect the stock market. A good stock trading simulator will allow you to get an idea how different changes can influence individual stocks as well as the overall stock market.

Unfortunately, playing with fake money and accumulating big profits is not the same as making real investments with real money. Mock stock trading doesn’t prepare you for the real thing. There are several reasons why your success or failure in a mock stock trading competition does not necessarily translate into the same success or failure in real life.

Assumption of Risk

When you buy and sell stocks in a mock stock market, you tend to take much bigger risks than you would normally do if you were actually buying or selling stocks with your own money. Paper trading or the simulation of real trades becomes more of a game or a study in the way the stock market can either reward you for taking big risks and being right or punish you for taking big risks and being wrong.

It is no different than playing a game like Monopoly. In that game, the idea is to accumulate all the property and wind up bankrupting everyone else. In real life, you would find it very difficult to control the housing market and gain a monopoly. Even Donald Trump would have a hard time playing Monopoly for real.

A Balanced Approach

Most prudent stock investors will create a portfolio that is balanced and diversified. Such an approach reduces overall risk and also reduces the chance for huge gains. In a mock stock market, one can experiment with individual stocks or with unusually high risk and high return stocks. You might get lucky in a new technology or biotech stock and think that you can do it again in real life.

Trying to repeat the same performance with high-risk stocks in real life is usually a losing proposition. For every one winner, there are probably at least 10 losers. You should never risk more than a small portion of your entire stock portfolio on highly speculative stocks.