Anyone who has ever studied the basics of personal finance knows that one of the keys to financial freedom is investing your money early on.
For this reason, people might find themselves looking for ways to learn how to invest money in the stock market. However, many who venture into this space end up losing money, which is why learning the ropes and practicing in advance are so important. That’s where demo accounts come in.
Demo trading accounts are one of the best ways to practice trading and investing without risking your money. They allow you to test out different strategies and learn about trading without gambling with real cash.
This guide will cover all you need to know about demo trading accounts, helping you choose the right one that will empower you to learn and practice trading free of charge.
What is a demo trading account?
A demo trading account is a digital simulation of an actual trading account that allows you to practice trading with fake money, sometimes referred to as “paper money.” These accounts let you start trading stocks, commodities, futures, options, Forex, index funds, ETFs, and even crypto without risk while using actual data from the real stock market. This kind of simulated trading is also called paper trading.
Brokerage firms and other trading platforms typically offer demo accounts to their new users to help them become familiar with how the platform and its tools work. They also offer these accounts to help novice traders and investors familiarize themselves with the markets before making their first real investment.
However, beginners to investing aren’t the only ones who use demo accounts. Experienced traders also rely on demo accounts to test new trading strategies and determine if they’re worth a shot in the real world.
The upside of the growth in online trading platforms is that more and more demo accounts are becoming available to those who dream of becoming retail investors.
How a demo trading account works
A demo account is a simulation of the stock market run on a brokerage’s trading platform. That means that each simulation software will have varying degrees of complexity and accuracy. While this might make shopping for a demo account a little more challenging, it also means you’ll have the ability to choose an account that fits your needs and goals.
When you open a demo account, you’ll be provided with an initial sum of fake money, sometimes called virtual money. The amount you get with a practice account varies from broker to broker, usually falling in the range of $10,000 to $100,000, although some brokers offer unlimited virtual funds. You can use this money to practice making trades.
Demo account simulators are designed to follow the market as closely as possible. To do this, the brokerage firm will collect data from multiple sources and estimate the price quotes of different assets at any given time.
Note: Not all accounts that offer demo accounts will offer their live accounts to U.S. residents, but the service can still provide a platform for practice.
Differences between a demo account vs. live trading account
Trading in a demo account is not the same as trading in the real market. The main differences between demo trading tools and real trading are:
- Quotes in the demo account are only estimates of the real market prices. They can sometimes be off by considerable amounts.
- Some demo accounts don’t have access to all the markets or assets the broker would offer in a real account.
- Demo accounts offer better execution than real accounts since orders are filled automatically and instantaneously. In the real world, it takes time for orders to be filled so, by the time the order is executed, prices might have already changed due to live market conditions.
- Since they work with fake money, demo accounts frequently provide more starting capital than what you might actually begin with when using a real account.
Typical features of a demo trading account
Although all demo accounts work the same way, different providers will offer different functionality. The available features could make any particular platform a smarter choice for different traders.
Some of the most important features to consider when you’re choosing a good demo account are:
- Range of markets: Some demo trading accounts only focus on single markets like Forex or cryptocurrency, while others offer access to dozens of markets from around the world. For example, the Pepperstone webtrader demo account focuses solely on Forex trading. In contrast, the Capital.com demo account lets you practice with commodities, indices, Forex, cryptocurrencies, stocks, and ETFs (although it doesn’t offer the chance to practice trading on the futures market, which the live account does allow).
- Real-time market data: This feature makes all the difference in terms of accuracy. Demo accounts that don’t rely on real-time data are less accurate than those that do.
- Trading with leverage: Good demo accounts let you practice trading with leverage (also known as margin trading or trading on margin), which can go from as little as 10:1 or less to as high as 500:1 or more. This basically means trading with borrowed money from your broker. Trading with leverage of 10:1 means that for every dollar you put in, the broker puts in 9, so you can effectively buy 10 times what you invest out of your pocket. This amplifies your potential gains, but also your potential risk and losses.
- Advanced tools: Ideally, a demo account will offer the same advanced analytics and charting tools you’ll get when using the live account. However, some brokers will only provide a handful of essential tools in the demo account.
- Regulation: The level of regulation a broker is subject to is as important for the live trading account as for the demo trading account to avoid scams.
Pros and cons of demo trading accounts
- Demo accounts are a great way to learn how to trade without risking money.
- They help you learn about different order types such as market orders, limit orders, stop-loss orders, and more.
- These accounts let you test and learn how to use different trading apps, including some or even all of the tools they offer.
- You can run your experiments risk-free.
- Price quotes and spreads are estimates in a demo account and can differ considerably from the real market.
- Trading a demo account successfully doesn’t correlate well with successfully trading in the real market due to the real-time price changes.
- In some cases, demo-account holders can only use a reduced number of demo tools, not all of them.
How to choose the best demo trading account for you
Now that you know the basics of these free demo accounts, here are some tips to guide you when choosing the best platform for you:
1. Choose according to the assets you want to trade
If you’re planning on trading a specific asset class, you’ll want to look at the best brokerage accounts for that particular asset since they often offer the best demo accounts as well.
For example, for Forex, you can choose Pepperstone’s MT4 Demo Account. But if you only plan to trade stocks, eToro is a great option. (eToro also made our list of the best cryptocurrency exchanges.) However, if you just want to learn to trade in general, a good choice is Capital.com.
Just be aware that some of these platforms will only be available to U.S. residents as a demo, not as a live account. But you can learn the basics and then choose a different platform when you’re ready to trade for real.
2. Choose the most feature-rich option
The best demo accounts provide features that allow you to manage your account like a live one, such as offering the ability to add or remove positions, place stops, use margin, etc. Some may also offer a mobile app, while others won’t.
3. Check user reviews
Reading user reviews can provide plenty of insight to help you choose a demo account. Searching for “user review” plus the words “demo account” (in quotes) will help you find relevant reviews.
Things to look out for when choosing your demo account
Even though you won’t be trading with real money, it’s still important to make sure a broker is legit before submitting any personal data on the platform. To avoid falling into a trap, watch out for these red flags:
Brokers that are not regulated
If a broker doesn’t say it’s regulated, odds are it isn’t. But even if they do say so, you should still check the regulator’s website for the broker’s registration number to see if it exists. If they’re regulated by tier-1 regulators such as the SEC or CySEC, even better.
Brokers that have been fined
It’s usually not hard to determine if a broker has been fined or otherwise disciplined by a regulatory agency. If that’s the case, you’ll want to check why they were fined, as well as if the same agency still regulates it.
Prices and spreads that don’t reflect the real market
Some brokers will try to lure you into investing real money on their platform by rigging the demos account in your favor. You can assess this by comparing asset prices and spreads with real market data. If the differences between the demo account’s spreads or prices and the real market data are too noticeable, it’s a big red flag.
What is the best demo trading account?
There is no one-size-fits-all when it comes to demo accounts. It depends on your needs and experience. For example, Capital.com has a good demo account for newbie traders in general. For those who want to learn Forex, Pepperstone is also a good choice, and for those who want to trade stocks, eToro may be better, but it all depends on your particular situation.
Can you make money on a demo trading account?
No, you cannot make real money in a demo trading account, only fake money. You can’t transfer funds from your demo account into your live account either.
How long does a demo trading account last?
Many demo accounts only last for 30 days. A few others last 3 to 6 months, while others don’t have a time limit, and you can keep using them whenever you feel like testing out new strategies.
When you’re working toward achieving financial freedom, one of the first things you might do is to start investing, but there are many different ways to go about it.
While some of the best investment apps offer pre-packaged portfolios or robo-advisors that could provide a decent return on your money with minimal input, you might be more interested in individual stocks, the Forex market, or cryptocurrency. This requires learning how to trade and getting plenty of practice on your trading skills, which is why you might benefit from a demo trading account.
If you want to find the best demo account for you, start by choosing one from a broker specializing in the types of assets you want to trade, which gives you access to the relevant markets you’re interested in.
After comparing features, reading user reviews, and deciding which one to choose, you’ll be much closer to achieving your financial goals and starting to build your trading experience.