A stock market simulator is a program or application that attempts to reproduce or duplicate some or all features of a live stock market on a computer so that a player may practice trading stocks without financial risk. Paper trading (sometimes also called "virtual stock trading") is a simulated trading process in which would-be investors can 'practice' investing without committing real money.
This is done by the manipulation of imaginary money and investment positions that behave in a manner similar to the real markets. Before the widespread use of online trading for the general public, paper trading was considered too difficult by many new investors. Now that computers do most of the calculations, new investors can practice making (or losing) fortunes time and time again before actually committing financially. Investors also use paper trading to test new and different investment strategies. Stock market games are often used for educational purposes.
For example, investors can create several different positions simultaneously to compare the performance and payoff characteristics between multiple strategies. A textbook may state that writing a covered call is synthetically the same as writing a naked put, but in practice there are subtle differences. With a paper trading account, an investor can set up a bull credit spread and a bull debit spread simultaneously and watch how the payoff for each position changes as the market moves.
Other advanced strategies include leverage, short-selling, forex and derivatives trading. Successful execution and profit generation from these strategies usually require high levels of technical knowledge. Investors can test these strategies with paper trading to avoid taking on excessive risk due to inexperience.
Various companies and online trading simulation tools offer paper trading services, some free, others with charges, that allow investors to try out various strategies (some stock brokerage firms allow 14-day 'demo accounts'), or paper trading can be carried out simply by noting down fees and recording the value of investments over time.
The imaginary money of paper trading is sometimes also called "paper money," "virtual money," and "Monopoly money."
Types
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Stock market simulators can be broken down into two major categories - financial market simulators, and fantasy simulators.
Financial simulators
Financial market simulators allow users to generate a portfolio based on real stock entries and help them train with virtual currency. Most of the currently active financial simulators use a delayed data feed of between 15 and 20 minutes to ensure that users cannot use their data to trade actively on a competing system. Some simulators can produce random data to mimic price activity. The purpose behind such a system is to let a person practice with fantasy funds in a real-world context so they can determine whether or not they would gain money investing by themselves.
Fantasy simulators
Fantasy simulators trade shares or derivatives of real world items or objects that normally would not be listed on a commodities list or market exchange, such as movies or television shows. Some simulators focus on sports and have been linked to active betting and wager based systems.
Technology and implementation
Most of the online stock simulators run on either C, C#, Java, JavaScript, ASP or PHP with a MySQL or PostgreSQL database. Some of them are open source, and others are proprietary with the code being sold as valuable prediction market software. Such is the example with the HSX Virtual Specialist. This technology has been sold to major film studios such as MGM and Lion's Gate Films, as well as to the Popular Science team for use in their PPX system.
Stock Market simulator engines can also be customized for other functions than just basic stock information tracking. The HSX engine has been modified to track popular science trends and also to track YouTube videos. Other applications that can be implemented with this software include popularity tracking and ranking from a set scale rather than an actual numerical value.
Stock market games
Stock market games are speculative games that allows players to trade stocks, futures, or currency in a virtual or simulated market environment.
Stock market games exist in several forms but the basic underlying concept is that these games allow players to gain experience or just entertainment by trading stocks in a virtual world where there is no real risk. Some stock market games do not involve real money in any way. Players compete with each other to see who can predict the direction the stock markets will go next. Many stock market games are based on real life stocks from the Nasdaq, NYSE, AMEX or other major market indexes.
Stock market games are often used for educational purposes to teach potential stock traders and future stock brokers how to trade stocks. Stock market games can also be used for entertainment purposes and to engage in fantasy trading competitions.
Some stock market games are not based on financial markets at all. These virtual stock markets are often based on things like sports or entertainment 'stocks'. Players are asked to invest in a particular sports team for example. If the team is doing well, the stock goes up and if the team is playing badly the stock value for that team falls. Another stock market game, Empire Avenue, links a player's share value to their activity on social media sites thus motivating players to invest virtual currency in other players whose social media influence ranks highly. Stock market games are often built into many other prediction games.
Relevance
Simulators could be deceptive or sometimes misleading, giving the beginner a wrong impression that live trading is an "easy fill".
These simulators are subject to criticism because they introduce to trading used to do speculation that is considered negatively in the moral context.
See also
- Investment Game
References
