Stock Market Simulation: Best Of Both Worlds
A stock market simulator let’s you “trade” on the markets without risking your real money. Which is great because, let’s face it, most of us are downright freaked out about investing our hard-earned cash in the stock market. We’ve convinced ourselves that buying stocks is akin to gambling — and that we’ll inevitably lose it all.
However, let’s step back. Take a deep breath. Evaluate things before we go down the rabbit hole of cynicism and despair. Putting your money into the stock market isn’t like gambling at all; in fact, investing in the stock market is actually a top investment alternative. With interest rates dismally low, stashing your money solely in a savings account won’t even outpace inflation. The average bank interest rate for savings accounts is a paltry .21 percent! (The average rate of inflation is roughly 3%: View Historical Inflation Rate Data from 1913 to the Present)
Something else that we often hear is, “I’m going to take all my money and stash it under my mattress. That’s the best way to know my money is secure.” This DEFINITELY won’t outpace inflation. In fact, you’ll end up losing money by saving this way because inflation will decrease your purchasing power over time. It’s as if the inflation gnomes sneak under your bed every night and slowly steal your money, until one day you wake up and realize the amount you stashed isn’t worth what it once was. Bad news bears.
The fact is, if you want to secure your money and ensure some degree of financial freedom for yourself in the future, whether it’s for retirement, a down payment on a home, paying off student loans, or just to have some extra money for recreation, you’ll need to invest it somehow and make your money work for you. Now, you don’t HAVE to put it into the stock market. There are other investment alternatives, but the stock market isn’t as scary as you think. And with the right planning, you can set yourself up for success.
You don’t have to dive right in. Using a stock market simulation allows you to get your feet wet before you start. If you’re still not sold, here are 5 reasons why you should use a stock market simulation today.
1. Practice investing
Like we just mentioned, a stock market simulation allows you to get your feet wet by simulating the real trading experience without the risk.
Research shows that individual investors learn from trading experience. Basically, the more you trade, the more you learn, and the better you get at investing. As they say, practice does indeed make perfect. Regardless of investment experience, we think a simulation should be part of everyone’s investing strategy, precisely for this reason.
But even if we don’t take the research into account, practicing lets you work out the cobwebs and gain some confidence. We admit, stock trading can be intimidating if you’ve never done it before, but that’s why a stock market simulation is so important. It provides you with a sandbox in which you can play around. And hey, you might better at it than you think!
2. Learn how the markets and indices work
If you’ve never traded before, you’ll need to get acquainted with the popular markets and indices. Namely, the NYSE and NASDAQ, and the S&P 500 and the Dow, respectively (if you’re trading in the US). Watching their fluctuations, learning their patterns, and so forth, is an important part of investing. And using a stock market simulation puts you right in the thick of things.
It’s generally accepted that language immersion is the quickest and most effective way of learning a second language. Learning how to invest should be no different. At SprinkleBit, we encourage new investors to think of the process like learning a new language because, well, it’s very similar. To be successful, you need to learn some new terms, concepts, how they relate to one another, and how to apply them in the right context.
We know using a stock market simulation isn’t as sexy as taking a 3 month vacation to Costa Rica to learn Spanish, but the benefits of immersion are still there. (However, you COULD use the simulation during your jaunt in Costa Rica while learning Spanish and kicking back on the beach with a Cuba Libre — excuse us while we check airfare prices…)
3. Learn how brokerages work
To trade on the stock market you have to use a brokerage. That’s your entry into the stock market; they hold the keys to the kingdom, as it were.
Today, online brokerages are popular due to their low commission cost (the fee you pay every time you buy or sell a stock) and streamlined processing. Brokerages are essentially the intermediary that makes sure your orders go through the way they’re suppose to and nothing gets screwed up.
For the sake of example, we’ll assume you plan on using an online brokerage.
Some are more complicated than others, but in general there’s a common system shared between the various online brokerages. And you’ll need to learn how this works so you can invest effectively. It’s not difficult, but better to learn the ins and outs before you put in your real money.
4. Test investment strategies
There are a variety of investment strategies one can use when they trade on the stock market and it’s important to try them out before you implement them in your real portfolio.
For instance, with your simulated portfolio you can experiment with long-term and short-term strategies, and different portfolio allocations and diversification techniques. Or, if you want to get crazy with options trading (more for the advanced investment nerds), maybe you want to experiment with an iron condor or an inverse straddle. You get the idea.
A common mistake of new investors that we’ve witnessed on SprinkleBit is not allocating enough money per investment. Or in other words, investing too little in each stock.
Let’s say the commission fee is $8.00 ($16.00 round trip). If you invest only $100 in a company’s stock, then you’ll have to see a return larger than 16% to see a profit. Generally, that’s considered a pretty big return. However, if you invest more — let’s say $1,000 — you’ll only need a return of 1.6%. It’s little “tricks” like this that you learn with practice and why a simulation is so important.
Investing isn’t a blind science. The best investors have a plan and they execute on that plan. Deciding on a strategy then testing it via a stock market simulation is the best way to ensure your strategy will work for you.
5. It’s fun
Investing isn’t a game, but trading on a stock market simulation IS fun. You don’t need to worry about your real money and you have the freedom to experiment. Watching your virtual portfolio increase in value is great positive reinforcement — and doesn’t it feel good that you’re actually learning something valuable from this “game”? We too love Angry Birds as much as the next person, but wouldn’t you like to use your precious spare time to learn something WHILE entertaining yourself? It’s a win-win.
What do you have to lose?
Certainly not your money! If you’re on the fence about investing, give a stock market simulation a try. There’s no risk and you might learn something in the process (and have some fun).
If you’re ready to take the plunge, we offer a free stock market simulation on SprinkleBit you can use to get started. See you there!
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