What is a demo account for trading?

Getting started as a trader can be exciting, but also daunting. Trading is a different proposition than investing for long-term growth. With long-term investing, you put your money into assets and – typically – leave it there for years (until you need it for retirement, for example). It’s good practice to check in on investment performance now and then and to make any tweaks that are needed. But generally, long-term investors can take a fairly relaxed approach to investment management.

Trading, on the other hand, involves short-term strategies to maximise returns on a quarterly, monthly or even daily basis. The idea is to make an immediate return from market fluctuations, for example by buying assets when the price is low and selling them at a higher price shortly after. It requires dedication and vigilance. While those that get it right can turn a profit, it can be a high-risk approach and isn’t for the fainthearted or those with no investment experience at all.

If you’re considering becoming a trader but lack experience, a demo account for trading can help.

What is a demo trading account?

Demo accounts are offered by a number of online investment platforms to let investors learn how things work and to practice trading with virtual money. You might hear using a demo account referred to as “paper trading”.

Who should use a demo account?

Demo trading accounts allow those new to trading to get a feel for trading markets and technology. They can make mistakes in a safe environment, without putting their own money at risk. They can also be used by more experienced traders that want to try out new trading strategies or start trading in different markets.

How do I get access to a demo account?

A number of online trading platforms offer some form of demo account. So all you should need to do is pick a provider that offers one and sign up. With some providers, you’ll need to create a regular account (most offer this for free) and then set up the demo account. Others will let you sign up directly to the demo account.

Are demo accounts free?

Yes. Unlike “live” accounts, which you’ll pay some level of fees and charges to use, demo accounts shouldn’t cost you anything or risk a penny of your own money.

Bear in mind that trading platforms don’t offer demos out of the goodness of their hearts, though. They provide them as a learning tool because they want demo account users to ultimately transition to a live account that will make the platform money. If, having tried out trading on a demo, you think you’re ready to trade for real, proceed with caution and start off small. And remember that you’re under no obligation to make the shift to a live account quickly or at all. If having tried it out on a demo, you decide trading – or trading in a certain market – isn’t for you, then walk away.

Check for any time limits on how long you can use a demo account, too. Some don’t have automatic limits, though they may expire if you don’t use them for a while. Others may expire automatically after 30-90 days.

How does a demo account work?

The details of how demo accounts work will vary between trading platforms. As a general rule, you’ll go through the following steps.

1. Sign up for the demo account. You’ll usually need to supply some basic personal details, such as your name and email address. You may also be asked about your trading experience and which assets you want to trade in.
2. Download any software required for the demo account. Not every provider will require this, as many will instead use web-based platforms or mobile apps.
3. Learn your way around the trading platform. Double-check how much virtual money you have to trade with. Depending on the provider, this can range from £10,000 to £1 million. Assess the tools on offer to help you trade and the different types of assets available to trade in.
4. Start trading. Try and make your trades as close to what you would do in real life. So if, in real life, you’d only spend up to £100 per trade, there’s probably not much point in blowing £10,000 on a single practice trade. Some demo accounts let you practice trading based on past markets, so you can see how different strategies would have worked in reality. Others allow for “do-over” trades. If the demo account allows it, monitor your trading history and returns so you can see what approaches consistently work well and which ones don’t.

You might have noticed we’ve mentioned strategies a couple of times now. Even with a demo account, it’s worth going in with a strategy to try out. Even if you get lucky with trial and error in the short term, it’s unlikely to work in the long term. Short selling is one example of a trading strategy, but there are others. The trading platform you use is likely to have advice guides on the different trading strategies.

What providers offer demo trading accounts?

Not every trading platform offers a demo account, but a number do. If you’d appreciate the chance to practice before you start trading, it’s worth looking out for a platform that has one. This might apply particularly if you’re new to trading, if you want to try out new strategies or if you simply want to familiarise yourself with how a platform works. Trading platforms that have demo accounts include Capital.com, eToro, IG and Trading 212.

Share dealing platform comparison

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

What are the advantages of using a demo account for trading?

Making use of a platform’s demo trading account has several benefits, linked to the ability to try out approaches without risking your own money. They include the following:

• Helps those new to trading learn the basics in a risk-free environment
• Allows new users of a platform to get familiar with how the technology works
• Lets novice and even experienced traders try out a range of strategies
• Allows traders who are experienced in certain asset classes to try branching out into less mainstream assets. For example, many start with share trading, but more experienced traders may want to test out what works in forex markets.

Are there any disadvantages to using a demo account?

Valuable as practising on a demo account can be, it’s not a direct replacement for the real-life trading experience. For example, demo accounts may do the following:

• May not offer the full range of features and functionality as live trading platforms and may only represent part of a stock market cycle.
• Can instil a false sense of confidence. Because you simply can’t lose (or gain) money on a demo account, it won’t create the same emotional response. This means that you may behave more rationally when using a demo account. When you start trading for real, you’ll need to develop tactics to cope with the excitement of successes and the shock of losses.
• Often let you trade with a greater amount of capital than you might have in real life. Many traders won’t have the tens of thousands of pounds that will be available to them in virtual funds. If you make bigger trades than you’d make in real life, the outcomes can’t be directly translated. So, tempting as it might be to go big, it’s best to practice using equivalent amounts as you would on a live trading platform.
• Often allow do-overs that aren’t possible when trading for real. This can potentially encourage you to be more aggressive and take risks that could be bad news on a live trading platform.

How useful is practising trading on a demo account?

Finder expert Zoe Stabler answers

Think of using a demo trading account as a bit like going on a first aid training course. Practising resuscitation on a first aid dummy could prove invaluable if you ever need to apply those skills to save someone, but that practice can never replicate the reality of pounding on a human being’s chest.

OK, so that’s an extreme example, but hopefully, it gets the point across. Demo accounts can be great practice tools for new and experienced traders alike, but – for the reasons we’ve highlighted above as disadvantages – your experience with a demo may be very different to your experience when you trade for real.

Long story short, don’t assume that just because everything’s gone swimmingly during practice, you’ll immediately do brilliantly when your own money is at stake. Don’t be so overconfident that you take too many risks, and also make sure you have coping strategies for when things don’t go as well as hoped. Remember, it’s the nature of investing to be risky and you’ll probably lose at least some of the time.

Bottom line

If your chosen trading platform offers a demo account, it’s well worth making use of it, especially if you’re new to trading. It could even be one of the factors that affect your choice of platform in the first place, particularly if you want to be able to try trading in different markets and using different strategies without putting your own money at risk. Just remember that trading simulations can’t completely replicate the experience of trading for real. Be prepared for this if and when you make the shift to a live account.

Frequently asked questions

• Is a demo account the same as a real account?

  No, for several reasons. Firstly, and importantly, you won’t have to pay any fees…and you can’t make any real money. There may also be some features and functionality that are different, depending on the account. A demo account, for example, may allow do-overs. That won’t be possible in a live account. And a demo account may not quite represent live market conditions in the same way as a real account.

• Can you make money on a demo account?

  Sadly not. You don’t pay any fees, or put your own money at risk, to use a demo account. So it stands to reason that no matter how successful your practice trades are, the “paper” returns you make won’t be worth anything in real life.

• How do I make the move from a demo account to a live trading account?

  The practicalities of switching from a demo account to a live account should be pretty straightforward. It can be as simple as clicking a few buttons and adding funds to a live account. Depending on what you provided when you opened the demo account, you may be asked for extra details too – such as proof of ID. Don’t underestimate other consequences of making the move, though. Make sure you have strategies in place to cope – emotionally and financially – with the thrill of successes and the shock of failures.

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