There’s so much going on in the stock market that sometimes it is natural to be confused. If you are someone who is into trading or lately trying to understand the crux of trading, then you would have come across paper trading and live trading. While they are very similar, you know they are not the same. The real question here is how they differ. What similarities do they share, and how can you benefit from each of them? This article has got you covered!
What is Trading?
Trading is simply an act of buying or selling commodities such as stocks, bonds, etc., unlike investing, which works on a buy-and-hold strategy. An investor usually holds a stock for a longer duration than a trader.
In a nutshell, trading is an exchange of commodities between two parties for profit.
Paper Trading and Live Trading
Paper trading and live trading are a type of trading where one is virtual, and the other isn’t. We will have a detailed look at each of them and compare them to understand the benefits and differences between the two.
Paper trading is a simulated trading platform for all aspiring traders. One can practice trading here with the use of virtual money or funds that can be used to sell or buy stocks. Hence there is no capital risk involved.
Know more about paper trading through this article: What Is a Paper Trade? All You Need to Know!
Live Trading involves using actual money in the stock market to make profits in a given time. It involves the use of a broker, unlike paper trading.
Differences between Paper Trading and Live Trading
Capital used is one of the key differences between paper trading and live trading. Paper Trading uses virtual money; in other words, no real money is used in this process. On the other hand, Live trading involves the use of actual money, so your capital is at stake.
Profit & Loss
There is no actual profit or loss in paper trading with regard to your funds. You will know how much profit or loss you can potentially make through paper trading, but with live trading, things get real. You gain actual money and also have the potential to lose.
Paper trading is stress-free as no capital is at risk. One can try out new strategies, experiment with the market and make decisions. However, live trading is highly stressful for few and involves excess emotional commitment too. The sudden changes in the market scenario demand you respond immediately, without which you may put your capital at higher stakes. The scope of financial disaster and financial success is high in live trading. Hence the stress is real.
From pre-market analysis to post-market analysis, a trader in paper trading has enough time to practice and learn all the processes of trading. However, in live trading, you must be quick to respond, and you have no time for practice in the way paper trading allows you to. A simple press of the wrong key on your phone can cause undesirable consequences, but all of this can be avoided through proper practice, which you may get through paper trading.
Commissions & Slippage
You will have to pay for using certain platforms and using certain services for every trade you make. You can easily skip this in paper trading, but with live trading, as money gets real, so do the charges one has to pay in making them.
One key disadvantage of paper trading is that it sometimes omits the underlying costs paid during a trade. One might be completely unaware of this cost in paper trading, but in live trading, one needs to pay for the services.
However, each type of trading accounts for its own valuable learning and experiences. Having said that, let us look at the key features of each of these trading methods.
Key Benefits of Paper Trading
Your capital is not at stake as you are using virtual money.
Practice & Confidence
Paper trading allows you to learn trading through its simulators that help you learn the market. This repeated exposure in market trading also boosts your confidence.
As there is no money at stake, one need not worry about financial disasters. In addition, it is only a learning platform. Hence, one wrong move will not cause a financial blunder. You can try, fail and succeed in your time. There is no rush; there is no stress!
Key Benefits of Live Trading
You can apply all your strategies to make real money here. Both profit and loss get real with actual capital at stake. Live trading is a platform where one can use the stock market to make money.
You also end up having full control over the decision-making in the stock market. However, this control or freedom also will have its consequences depending on how you lead your trading.
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