Why Paper Trading is the Smartest Way to Start Investing (Without Risking Real Money)

I'm going to talk to you real quick about using something called “paper money” in order to learn how to invest. Paper money trading is really cool. Let me tell you about it.

What is Paper Money and Paper Trading?

What is paper trading? Paper trading is an idea that means trading stocks with pretend money, but doing it with real numbers in real time.

By combining the internet with the idea of paper trading, we have a really great package for online stock trading that helps us develop ourselves as investors, without taking any real money risk. We can also trade paper money without incurring the kind of emotional trauma when we use real money and we know that we don’t know what we're doing.

Today, many major brokerages offer paper trading platforms with features that simulate the real market environment, including limit orders, stop-losses, and portfolio analysis tools. This means you can practice using all the mechanics of a real brokerage account — from buying and selling to setting alerts — without ever risking a dollar.

How to Set Up a Paper Trading Account

What you should do is get yourself onto one of the paper money trading sites. Think or Swim is the one that we use a lot, but there might be some other great sites out there.

If you're new to Rule #1 Investing, start by setting up your account with Thinkorswim by Charles Schwab or Interactive Brokers, both of which offer robust paper trading options. These platforms allow you to experiment with stock screening, tracking watchlists, and even setting up notifications based on your Big 5 numbers and 4Ms. If you prefer to find your own, just google “paper money” or “paper trading” and go out there and get your account set up.

After you sign up, on thinkorswim.com you end up with about $200,000 of pretend money to "invest" in a system that's using virtually real time data.

🎯 Pro Tip: Use your paper account to only “buy” companies you would actually consider owning under Rule #1 criteria — businesses you understand, with durable moats, trustworthy management, and on sale with a margin of safety.

Why You Should Practice Stock Trading

When you start investing you want to see that the effects are going well for you before you go out and start investing with real money. You want to have the benefit of doing some real trades before you start using real money because stock trading for beginners can be scary using real money when you've never done it before.

The emotional component of investing — fear of loss and excitement of gain — is very real. Paper trading helps you experience these emotions in a low-risk way. You can make bold decisions, learn from mistakes, and refine your investing checklist before your real money is on the line.

What Do Rule #1 Investors Use Paper Trading For?

Rule #1 Investors use paper money all the time. We do back testing with paper money, we practice trades in paper money and we use it in all of our classes.  Get set up with a paper trading account as soon as you can, so that you start to be able to do almost real trades as a way of working yourself into real investing.

By the way, if you're starting with no money at all, you have zero money, paper money is free. You can do real world investing, just the same as you would with real money, while you're saving up to get that first $1,000.

In addition to practicing trades, paper trading is invaluable for applying Rule #1 valuation tools. Test your calculations for Sticker Price, Margin of Safety, and Payback Time by entering those price targets into your paper account and watching how the market behaves. This turns theory into confidence.

🧠 Bonus Tip: Run mock portfolios with different industries or market cycles. For example, create a recession-resistant paper portfolio versus a high-growth portfolio and track performance over several months. This teaches you how different kinds of businesses behave in different economic conditions.

Conclusion

Hey, I started with $1,000 dollars and I turned it into a million dollars. If I can do it, so can you.

If you liked this blog and you want to learn more, learn how to invest with my FREE Digital Introduction to Rule #1 Online course. This course is packed with exercises and videos to teach you what Rule #1 is all about.

Now go play.

If you'd like to see how you stack up against experienced investors, take my Investing IQ Quiz!

**Editor’s Note (Updated April 2025): This article was originally published in 2014 and has been significantly updated in 2025 to reflect current examples and Rule #1 investing insights.