There are both advantages and disadvantages to using dummy accounts for online stock trading, however, for newcomers, the advantages far outweigh any drawbacks.
What is a Dummy Account?
A dummy account is an account on an online share trading platform that functions in exactly the same way as a regular account – except that the money traded is not real money, it is virtual money! This means that it is not possible to lose any money when you are trading on these accounts, of course, it’s not possible to make any money either, but at the beginning, it is important not to minimize your losses.
Why Use a Dummy Account?
Using a dummy account can help you become familiar with the trading environment – the terms used, the way the market moves, the share trading platform interface, and the actual nuts-and-bolts processes involved. It really is a crucial tool for learning the ropes, because if go into the real market unprepared you will be naive and open yourself up to losses, potentially large losses.
Just become familiar with the terminology will help you immensely when it comes to understanding what is happening around you, participating in and learning from specialist websites and forums, and completing verbal trades. It will also help you understand the full functionality of the platform you are using and use the software to its full potential.
Experience the Different MarketsThere are many different markets that you can trade in – equities, forex, futures, commodities, etc – and most experts recommend that you choose one to start with and master that before moving on to another. Using a dummy account it is possible, indeed preferable to experiment on all the different markets, evaluate their suitability for what you want to achieve and then decide from experience which one you wish to get started on.
Stocks and Shares for beginners are apparent then that using a dummy account is a vital step on the learning ladder for newcomers who want to be able to trade shares online, however, it is important to understand one thing. Using a dummy account is not necessarily an indication of real-world results. Just because you may do well on a day’s trading, do not think that you are suddenly an expert trader, similarly, a large loss on a dummy account is no indication that the same will occur when using real money.
Dummy accounts are simply there to help you learn the process of trading, not to develop a strategy!
Do’s and Don’ts for Beginners Buying and Selling Shares
Do use Limit Orders- Limit orders are used to limit your exposure to losses and essentially work by imposing an order to sell once a share falls below a certain level. For example, if you buy shares at 1 and impose a limit order of 10% if that share price begins to fall then once it falls 10% all your shares in that stock will be sold. Now, although you have taken a 10% loss, it is likely that you would have taken an even bigger loss if you had waited to sell. This kind of limit order is a recommended policy to cap potential losses.
Don’t engage in short selling.- short selling is a kind of mirror image, or reverse, of regular trading. In this scenario, you are betting on the share price falling, rather than rising. this works as follows; you purchase the right to sell the shares at a particular price (the current price) 1-3 days in the future. When that day arrives you must buy the shares to complete the transaction. So, for example, on day one the price is 1 a share and you purchase the right to sell these shares for that price 24 hours later. Now overnight that share drops in value 25%, so now you hold the right to sell shares for 1, but when you go ahead and buy the shares the next day because the price has fallen you only pay 75p hence making 25p per share.
However, if the shares increase in value you are left with a loss as the price you must buy at will exceed the price you can sell them at. Short selling requires a deep knowledge of the market and can expose you to heavy losses
Similarly, Margin Trades should be avoided at all costs too. Here, once again you are not buying an asset, but gambling on the movement of shares, and as such potential losses are open-ended. this is a very risky strategy and should be avoided as a matter of policy.