Every Wednesday, we publish our ?Investor Toolkit? series on TSI Network. Whether you?re a new or experienced investor, these weekly updates are designed to give you advice on how to trade stocks and other investment topics that will help you develop a successful approach to investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.
Today?s tip: ?Practice accounts are advertised as a good way to learn how to invest, but they can encourage investors to develop bad habits.?
The online brokerage industry is winning a lot of attention and goodwill for itself by offering ?practice accounts?. These accounts are supposed to be identical to real accounts in all but one respect: you trade in them with imaginary or ?play? money, rather than the real thing. The industry says this gives would-be traders a free opportunity to learn how to trade online, without risking any money.
I?d say that?s a misstatement?a classic example of the essence of marketing, which is to describe a feature in such a way that the prospect comes to see it as a benefit.
Practice-account users aren?t learning how to invest. They are just learning how to enter orders online. Rather than an educational experience, practice accounts are a little like play-money sessions at Las Vegas, where gambling novices can learn to play casino games without risking any real cash.
In the casino, you are learning how to play the game. But you aren?t learning how to win the game, because that?s not possible. In the end, players can?t overcome the statistical advantage built into casino games that gives the house an edge. You are learning how to avoid losing your money any quicker than you choose to, and how to avoid making a spectacle of yourself in the process.
"Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada": In this special report, Pat McKeough gives you his time-tested advice on how you can make more money from your investments and save thousands on brokers' fees and other expenses. Best of all, you can get a copy absolutely FREE. Click here to claim yours now.How a lucky streak could lead to big risks
Using an online broker?s practice account, you can learn online trading essentials, such as how to enter a buy order or a sell order; how to double-check your order before submitting it, so you avoid obvious but common mistakes like buying 10,000 shares when you only meant to buy 1,000; and so on. In doing so, you can choose what stocks to buy, but the only feedback you?ll get on your choices is the price changes they go through after you buy.
However, there is a large random element in short-term stock market results. It will take months or years before you know if your choices are likely to provide attractive long-term returns. In fact, the real test will come only when you see how you do in the next bear market.
Public-relations efforts on practice accounts often refer to them as good places to learn about day trading and options trading, which are big money earners for online brokers. Most non-professionals who get involved with day trading or options trading wind up losing money if they stick with it long enough. In that respect, they are a lot like casino games.
The big risk with practice accounts is that you?ll try out a risky and ultimately unwinnable investment approach, like day trading or options trading, and hit a lucky streak. This could embolden you to put serious money at risk just when your results are about to regress to the mean and deliver losses instead of profits.
COMMENTS PLEASE?Share your investment experience and opinions with fellow TSINetwork.ca members
Have you ever used a brokers? online practice account? What did you learn from it? Did it make you a more successful investor in any way? Let us know what you think.
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