Editor’s note: This article was first published in February 2011; the remark about trading without counting commissions reflects broker fees at that time, and the first further-reading link is a 2011 investment outlook.
A reader has put a question to us: how useful are simulators for learning to invest in the stock market with virtual money? The truth is that a lot has been said about this, and the doubt has always been whether, once you get good results in a simulator, you are really ready to invest real money.
The answer is complicated, but basically it is that they don’t prepare you properly. That doesn’t mean they aren’t worth using to see how a stock behaves and, above all, to learn how to use the trading platform. Never invest through a platform before you know how to use all the features it offers. We explain why below.
We’ll base this on two very common sayings about stock market investing:
- 1. Stock market investing should be a financial matter, not an emotional one.
- 2. The stock market is driven by two factors: ambition and fear.
- It is true that when we decide to invest in the stock market, the advice is not to “put” your heart into it. Don’t grow fond of the company, only of the value the share can bring you. It’s only money, but when you invest your own money it becomes something emotional for you, because your mood and emotional state will change depending on whether you make gains or losses.
With a stock market simulator, the investment doesn’t become emotional, because you aren’t really risking anything of your own. In fact, you are literally playing while you learn.
Losing €10,000 of virtual money doesn’t hurt the way losing €400 of real money does, so in the simulator you will make decisions you would never make with real money invested.
It’s like learning to fight on a simulator: once you win the game, you decide to take on a real hand-to-hand fight, and that’s when you discover that the machine’s punches never hurt.
- Ambition and fear. While ambition can clearly be present in a simulator even though you know it’s virtual money (you want to win), fear disappears because you aren’t risking anything.
If the shares in the simulator fall 5%, you can calmly think that they’ll go back up, and if they fall even further, so what. You can sell at a loss to put the money into another investment, and you can even afford to trade without counting commissions.
With real investing, and I speak from experience, when you see the share you’ve put your money into starting to fall, worry inevitably sets in. You make a point of finding out why the stock has fallen, you look into the company’s plans for the future and the agreements it has signed, and you search for any information that will help you work out whether it will keep falling or whether the drop is temporary. That’s investing.
In short: in a simulator you play and gamble; in the real stock market you invest and learn, because human beings, and every investor, are driven by emotions (fear, ambition, greed and so on), and you’ll never find that in a simulator. So you won’t get to know yourself as an investor until you start investing your own money. I’m the first to take part in stock market games and competitions now and then, and more than once, at the close of the day, I know I need to sell some shares and buy others first thing the next morning, but if I’m busy I don’t do it. That never happens with my real portfolio.
However, as I said at the start, simulators can be useful for watching how stocks move and seeing that investments don’t always turn out as we expect, especially in the short term.
Further reading
- The most profitable investments for 2011: investment analysis
- A basic principle of investing: patience
- Investment funds: don’t let the bank take you for a ride
Featured image: McLoughlin Bros, Public domain, via Wikimedia Commons.
