investing

How to simulate penny stock trades

Don TaylorDear Dr. Don,
After reading your column about penny stocks, I'm intrigued. So, I wanted to follow up and ask whether there's a good way for me to practice buying and selling these penny stocks. I understand that you suggest about six months of such simulation, correct?

Thank you,
-- Franz Fortune

Dear Franz,
First, thanks for reading and for your question. If you thought I was recommending that our readers invest in penny stocks, you missed the real point. This typically is not investing; it's speculation.

These are equities that typically have low prices and are traded "over the counter," or not on the major exchanges. They are not the names of major, recognizable companies.

Don't use money you can't afford to lose when speculating in penny stocks. It is important that you first have the remainder of your "financial house" in order first.

There are several websites that allow traders to manage simulation portfolios for free. One is a free site that lets you trade $25,000 in virtual cash. Another lets you trade an imaginary $100,000. It is a little like playing with fake money in the Monopoly board game.

What's key is how the simulation prices your trades and whether it lets you trade penny stocks, since that's precisely what you want to trade.

Trading a simulated portfolio lets you practice your trading strategies, assuming that you have some. At the same time, there are some behavioral finance issues that come into play here. Since you're trading "play money," you might be tempted to make riskier trades that you wouldn't do with your own money. That could mean some success in the simulation wouldn't translate to future success trading your own funds. So, be sure that the simulation really mimics what you plan to do when the stakes are higher.

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