I believe the investment world is changing. Whether it is the influx of Millennials, the crash of 2007 or the increasingly automated world of professional trading, the "stock market" as it has been traditionally understood is changing. Millennials are earning less than previous generations and are delaying buying a house and investing in real estate. Many, many commentators have observed this. A few have, perhaps condescendingly, concluded that Millennials will be more comfortable with a video game format over, say, a traditional brokerage format. They propose allowing Millennials to treat paper trading, and live trading, as a game that can be manipulated in the icon-heavy world of Millennial tech culture. I have been dabbling in these "video game" sites for a few months. Today, I will review Investopedia, the first I ever tried.
Investopedia is easily the most traditional of all the paper trading sites I've used. It allows, first of all, for the trading of stocks, bonds and options. Stocks can be held long (i.e. held while gaining value) or be sold short (betting a stock will go down and borrowing from a broker to capitalize on this). This is a very convenient way to start an investing career, since it allows you to dabble in several different types of trading and investment without having to face real losses. Investopedia has no live brokerage attached to it but you can compete in investment games against other traders.
Further helping Investopedia's "starter" reputation is the fact that there is an extensive, almost exhaustive, encyclopedia of every investment and trading strategy, term and process used throughout the entire investment world. In fact, I have seen reputable investment firms and funds reference Investopedia articles, making this a sort of clearinghouse for definitions and processes. When I first started investing, I went to Investopedia constantly to figure out how things work. I still reference it whenever I run across a concept I am unfamiliar with.
There are a few annoying quirks to Investopedia's trading platform. The first is the way it places market orders. Market orders are orders to buy a stock at the market value, i.e. if ABC Manufacturing is selling at $57.13 a share, a market order buys at $57.13. A limit order or a stop order, on the other hand, would buy a share once it hits a certain limit either going up (buy ABC Manufacturing at $58) or going down (buy ABC Manufacturing at $57). You can mix and match these orders in any form you want (buy ABC Manufacturing if the price reaches $57 but not if it fall below $56, etc). Investopedia, unfortunately, allows you to place orders into the system without checking to make sure you have enough cash on hand. In other words, you could place a market order for 1000 shares of ABC Manufacturing at $57.13 at a cost of $57,130. If, however, you only had $56,000 on hand in the portfolio Investopedia simply cancels your order without notice. This is only an issue if you are trading after hours, but I once missed a 24% jump in Chicago Bridge and Iron Company stock due to setting a market order slightly above my cash limit and walking off to work.
After the market order quirk, the only major quirk is the way Investopedia automatically assigns you margin. Margin is cash lent by your broker to you so that you can purchase more of a hot stock. It can be extremely useful if you pick a winner. If XYZ Chemical leaps from $20 to $30 and you own 100 shares, you have gained $1000 (20*100=2000, 30*100=3000, 3000-2000=1000 profit). However, if you can borrow from your broker, there is a chance you could purchase 200 shares. Your profit is now $2000, minus whatever commissions and fees your broker charges for using margin. Theoretically, you could double or triple your return.
The opposite is also true, however. XYZ Chemical could go from $20 to $10 a share. If you only paid cash, you would lose $1000 (20*100 still equals $2000, 10*100 =$1000, 20-10=10). If you were buying on margin, however, you might lose $2000. Your broker does not like losing money like that, especially since you lost the entire $1000 he/she/ze (there should be a pronoun unique to "indifferent corporate moneymaker") lent you. The broker might demand to be paid back the $1000, and since you only have $1000 worth of securities left (100 shares times the current price of $10=$1000) you will have to pay over everything you have. Your loss is 100% and you are now signing up for Mechanical Turk projects to pay your rent.
Obviously, margin is a two-edged sword (I don't like it and don't plan on using it). The federal government has restricted use of margin to investment accounts with 6 months trading experience so that you don't accidentally delete all of your retirement savings in your first trade on the stock market (for why the federal government should care, see Herbert Hoover circa 1929). Investopedia, however, assumes some degree of market competence and assigns you a 100% margin account. You automatically have twice as much cash as the "game" gives you. Which, when you are trading well, is fantastic (I have an account supposedly giving me 50% returns despite, you know, Greece...and China...and the almost complete disaster that is Saudi Arabia and the USA squabbling over oil). When your trading goes poorly, however, you end up with triple digit losses and theoretically owing more than the entire value of your account. I mean, this is paper trading so no one has to pay that bill, but it can be depressing when you're just learning the markets and you can't get out of the negative returns.
My final complaint with Investopedia is its stock screener, or lack thereof. You have to know what stocks you want to purchase before coming to Investopedia's stock simulator. In my case, I ended up using a fusion of Yahoo! finance, my broker's screener, and market watch.com. However, this required a lot of tinkering before I figured out what I was doing and kept my learning curve much longer than necessary.
All in all, Investopedia is a great place to start. You can learn a lot, fast, if you're willing to do that 20th century BC thing called reading. However, as I will mention in later posts, there are faster, more intuitive ways to screen stocks and paper trade. Investopedia is best kept at what its name implies: an encyclopedia dedicated to investing.
Investopedia is easily the most traditional of all the paper trading sites I've used. It allows, first of all, for the trading of stocks, bonds and options. Stocks can be held long (i.e. held while gaining value) or be sold short (betting a stock will go down and borrowing from a broker to capitalize on this). This is a very convenient way to start an investing career, since it allows you to dabble in several different types of trading and investment without having to face real losses. Investopedia has no live brokerage attached to it but you can compete in investment games against other traders.
Further helping Investopedia's "starter" reputation is the fact that there is an extensive, almost exhaustive, encyclopedia of every investment and trading strategy, term and process used throughout the entire investment world. In fact, I have seen reputable investment firms and funds reference Investopedia articles, making this a sort of clearinghouse for definitions and processes. When I first started investing, I went to Investopedia constantly to figure out how things work. I still reference it whenever I run across a concept I am unfamiliar with.
There are a few annoying quirks to Investopedia's trading platform. The first is the way it places market orders. Market orders are orders to buy a stock at the market value, i.e. if ABC Manufacturing is selling at $57.13 a share, a market order buys at $57.13. A limit order or a stop order, on the other hand, would buy a share once it hits a certain limit either going up (buy ABC Manufacturing at $58) or going down (buy ABC Manufacturing at $57). You can mix and match these orders in any form you want (buy ABC Manufacturing if the price reaches $57 but not if it fall below $56, etc). Investopedia, unfortunately, allows you to place orders into the system without checking to make sure you have enough cash on hand. In other words, you could place a market order for 1000 shares of ABC Manufacturing at $57.13 at a cost of $57,130. If, however, you only had $56,000 on hand in the portfolio Investopedia simply cancels your order without notice. This is only an issue if you are trading after hours, but I once missed a 24% jump in Chicago Bridge and Iron Company stock due to setting a market order slightly above my cash limit and walking off to work.
After the market order quirk, the only major quirk is the way Investopedia automatically assigns you margin. Margin is cash lent by your broker to you so that you can purchase more of a hot stock. It can be extremely useful if you pick a winner. If XYZ Chemical leaps from $20 to $30 and you own 100 shares, you have gained $1000 (20*100=2000, 30*100=3000, 3000-2000=1000 profit). However, if you can borrow from your broker, there is a chance you could purchase 200 shares. Your profit is now $2000, minus whatever commissions and fees your broker charges for using margin. Theoretically, you could double or triple your return.
The opposite is also true, however. XYZ Chemical could go from $20 to $10 a share. If you only paid cash, you would lose $1000 (20*100 still equals $2000, 10*100 =$1000, 20-10=10). If you were buying on margin, however, you might lose $2000. Your broker does not like losing money like that, especially since you lost the entire $1000 he/she/ze (there should be a pronoun unique to "indifferent corporate moneymaker") lent you. The broker might demand to be paid back the $1000, and since you only have $1000 worth of securities left (100 shares times the current price of $10=$1000) you will have to pay over everything you have. Your loss is 100% and you are now signing up for Mechanical Turk projects to pay your rent.
Obviously, margin is a two-edged sword (I don't like it and don't plan on using it). The federal government has restricted use of margin to investment accounts with 6 months trading experience so that you don't accidentally delete all of your retirement savings in your first trade on the stock market (for why the federal government should care, see Herbert Hoover circa 1929). Investopedia, however, assumes some degree of market competence and assigns you a 100% margin account. You automatically have twice as much cash as the "game" gives you. Which, when you are trading well, is fantastic (I have an account supposedly giving me 50% returns despite, you know, Greece...and China...and the almost complete disaster that is Saudi Arabia and the USA squabbling over oil). When your trading goes poorly, however, you end up with triple digit losses and theoretically owing more than the entire value of your account. I mean, this is paper trading so no one has to pay that bill, but it can be depressing when you're just learning the markets and you can't get out of the negative returns.
My final complaint with Investopedia is its stock screener, or lack thereof. You have to know what stocks you want to purchase before coming to Investopedia's stock simulator. In my case, I ended up using a fusion of Yahoo! finance, my broker's screener, and market watch.com. However, this required a lot of tinkering before I figured out what I was doing and kept my learning curve much longer than necessary.
All in all, Investopedia is a great place to start. You can learn a lot, fast, if you're willing to do that 20th century BC thing called reading. However, as I will mention in later posts, there are faster, more intuitive ways to screen stocks and paper trade. Investopedia is best kept at what its name implies: an encyclopedia dedicated to investing.
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