Why Is Demo Trading Bad for You?

WHAT IS DEMO TRADING?

Buying and selling stocks and shares are risky waters to dabble in if you have no prior experience or idea of how to do it.  Most people would prefer to learn to swim in the safe containment of a swimming pool rather than being thrown into the sea where there is real danger.  Certain brokers provide potential traders with access to virtual stock markets and give them virtual money to experiment with. This is known as a “demo trading account”. The manner in which the stock values rise and fall on these virtual stock markets is controlled by algorithms and have little or no link to what is happening in the real world stock markets, although they are designed to simulate situations that can possibly arise in real life.

WHAT IS IT’S PURPOSE

The purpose of allowing potential traders to experiment with ‘buying and selling stocks’ in a virtual environment with virtual money is to allow them to get a rough idea and feel for how the actual stock markets work in real life.  It can be useful in helping somebody decide if they really want to progress to using real money and trading in real stocks and shares.

HOW LONG SHOULD ONE USE DEMO TRADING BEFORE STARTING REAL TRADING?

There are varying views on this.  Some experts argue that nobody should involve themselves in demo trading at all, and the only way to learn is the hard way, i.e. being thrown in at the deep end, and launching yourself straight into the real stock markets.  Others maintain that a short period of experimentation with demo trading can be beneficial, not least in allowing the potential trader an insight into the way it affects their emotions, stress, lifestyle etc.  It can be enough to let you know that stock trading is NOT for you, and you will not have spent a single paisa.  Even the experts who are in favour of a little bit of demo trading, unilaterally seem to agree that indulging in it for too long can be detrimental in the long run.

WHY CAN IT BE BAD?

Trading in stocks and shares can be incredibly stressful, time-consuming, time-sensitive, and emotional.  It takes a certain kind of person who can manage the mental and physical strains that trading can bring with it.  Psychologists believe that trading in demo accounts does not trigger the same emotional response as real-life trading due to the fact that demo accounts do not use real money, and there is no actual benefit or threat to the trader.  Real money cannot be lost or gained, therefore an amount of apathy will present itself.  In real life, there is no place for apathy as a bad trade, or a missed opportunity can have devastating consequences.  

WHAT IS THE ALTERNATIVE TO DEMO TRADING?

Another option for new traders, which is recommended by some experts, is to go straight into trading in a live account but to begin with micro-amounts.  An initial deposit should last for a substantial amount of time and will give the trader real-life experience from the offset.  Trading in micro-amounts minimises the risks as the losses can only be small, but the experience of the real-life market is instant, and valuable time has not been wasted in playing with demo accounts which can themselves be environments where bad habits (which die-hard) are learned, and a false sense of safety can encourage risky trades.  There is really nothing like the real thing, to teach you the real thing.  As Warren Buffett has said “the more you learn, the more you earn”, which is quite right, but you need to ensure that you are learning the correct habits.

KNOW MORE

If you are interested to know more about demo trading in India, and its alternatives, GOODWILL INDIA will be able to help you.  We provide expert advice and help for new traders or those people who are considering becoming new traders.  We have special training courses specifically designed to ensure that potential new traders know exactly what they are getting into, and to teach them good habits from the very start.  Please head over to our website at  https://gwcindia.in/ or speak to one of our friendly advisors directly on +91 - 44 - 4020 5050.

What is Margin Trading in India?

WHEN MIGHT MARGIN TRADING BE USED?

What happens if you are very sure that you can make a good profit by buying and selling an item that you see advertised at a very reasonable price, yet you do not have the full amount of cash available to make the initial purchase?  You could easily miss the opportunity to purchase that item, as it will surely not be long before somebody with more money than you gets their eyes on it and snatches it away.  In a situation like this, you might well consider asking your friends and family to lend you the money to make the initial purchase.  If they have confidence in your knowledge of the product, they may well be happy to lend you the money for a small share of the eventual profit.


HOW DOES MARGIN TRADING ACTUALLY WORK?

Margin Trading is somewhat like the above example.  Once you have some experience and knowledge about the state of the stock market and you want to take things to a higher level without investing more cash, Margin Trading may be an option you wish to explore.  Let us now explain more about the concepts of Margin Trading.  Based on the above example, let’s assume you wish to purchase some stocks as you are confident that their worth will rise dramatically.  A qualified broker such as GOODWILL COMMODITY INDIA may be able to arrange for you to buy those stocks without stumping up all the cash.  They may arrange for you to make the purchase at a fraction of the actual price, on the agreement that the balance be paid to them at an agreed time.  If all goes according to plan, when the time to pay back the loan arrives, the stocks are speculated to have risen in value to such a degree that they can be sold on at a price that more than covers the original loan, and still results in a net gain for the trader.


FURTHER BENEFITS OF MARGIN TRADING

What makes Margin Trading even more attractive is that the Securities and Exchange Board of India (https://www.sebi.gov.in) has now made it possible in certain circumstances to conduct Margin Trading without putting forward any cash whatsoever and instead of using other shares you hold as collateral.  This can have the effect of generating a very high rate of return for only a small amount of capital invested.  It also gives you access to go for stocks that you would ordinarily be unable to afford, therefore it widens the opportunities for the trader.


WHAT TO AVOID WHEN MARGIN TRADING

You will now be aware of some of the benefits of the MTF (Margin Trading Facility), but as in all fields of life, one must be willing to accept the rough with the smooth.  That is to say that anyone considering availing of the benefits of MTF must also educate themselves of the associated risks involved.  As you are in effect borrowing money from your broker, there will be binding agreements in place which dictate what will happen should the value of the stocks you buy happen to go down instead of up.  Of course, they would expect you to settle the balance by injecting more cash, otherwise, they will usually reserve the right to take action against the borrower in order to recover their dues.  This is not limited to, but may include the liquidation of other assets in the Demat account or portfolio of the borrower.  There will also be a stipulated minimum balance that must be maintained.  The holder of an account that falls below the required minimum balance will be required to top up the account to avoid triggering the broker to take action.  For these reasons, it is advised to use the facility with caution to lessen the chances of finding yourself in such a situation.