One evening after a long day of work and nearly 3 hours of podcasts on trading as an income producing tool, I decided to look at my investment accounts. I had been investing since I was 16 years old when my dad helped me set up a custodial brokerage account. I was lucky with my first acquisition; it had nearly doubled in less than two years and was providing dividends that returned 8% on my cost basis.
Not too shabby for the research of a high schooler. However, I had a huge limitation at my age. I had no money and no risk appetite.
What I lacked in true funds I found in the world of online stock simulators. Investopedia was the site that I happened to find, and within minutes I had made an account. I had options to choose my starting cash position, a fancy leaderboard to keep me competitive, and a passion to see what I could do when risk was taken out of the equation. This was clearly a recipe for disaster.
There’s a saying in the world of wealth, diversity brings small fortunes and concentration brings big ones. As a naïve child of wealth, I figured I should learn how to make a big fortune. After all, one good stock pick is all it takes.
Discovering My New Fortune
Where am I now? I am 21 years old and haven’t touched a stock simulator in years. Why? Because I can actually afford to buy my own investments, with my own money.
But what would happen if you opened up your account and found $2,676,321.15 as your balance. That’s what happened when I decided to look at my old simulators. I was sitting at the rank of 74 out of 86,292 other investors. This put me in the top 0.00083% of all participating individuals. I was rich!!!
There it was – my crowning achievement. An investment that turned $49,135.24 into nearly $3 million. Sadly, I would never see a dime of it. I could have traveled, bought a house, funded a business, and given to charity had I actually bought that investment, but instead I was stuck with the agonizing pain of knowing that I did the research in one stock. That’s right, one stock, and I didn’t buy it in real life. Even if I had put my measly $500, I still would have turned that pocket change into $26,040 dollars.
What was this great investment and how did I get so lucky in picking it?
Are Stock Simulators Good for Learning?
The simple answer is yes. Stock simulators are perfect tools to learn about investing for high school and college students (I recommend Investopedia Stock Simulator). There are 3 main takeaways that simulators can teach people new to investing.
- They test and grow investment knowledge
- They allow participants to find risk appetite
- They show the importance of wise investment decisions
Most random investments will not turn out like my investment in AMR. The investment was risky and there was a large chance that it would completely drop to zero, similar to some of my other holdings that were small cap companies. That’s why I believe my story, above, points out important investment truths.
It’s rare that you will happen upon the next Microsoft, Nivida, or Apple, but it’s not impossible. Investors have done it before, and they will do it again. As a retail investor you may just have an easier time investing in these firms, not because you have immense capital, but because if you purchase a security no one will bat an eye, but if a large investment firm starts scooping up shares of a small company, then it will be seen in the public eye. You have the unique position of riding the wave, not creating it.
However, it’s not all sunshine and rainbows with investing, so let’s look at the 3 main takeaways when it comes to stock simulators.
Stock Simulators Test and Grow Investment Knowledge
If you’ve never invested in your life, it can be scary to purchase your first mutual fund, ETF, stock, or bond, but stock simulators can get you used to the feel of investing. Stock simulators allow you to build up your confidence in your knowledge, get you comfortable using buy orders, and show you if you know how to vet an investment.
These are all important skills that come in handy once you start investing with your own money. While it is always recommended to diversify your portfolio, mutual funds and ETFs should still be vetted carefully to assess management fees, risk, expected returns, and top holdings. Stock simulators will allow you to test your own ability in analyzing these investment vehicles and purchasing them.
Stock simulators will also provide you with the opportunity to learn the lingo of finance. You can’t properly analyze and investment without knowing certain terms such as, P/E Ratio, EPS, intrinsic value, future expected cash flows, beta, etc.. etc.. etc.. But simulators will give you the chance to say, “hey I don’t know what this metric means, maybe I should learn that before I invest.”
Stock Simulators Allow Participants to Find Risk Appetite
Similar to how you know your limits with food and how eating that next cheeseburger will cause your stomach discomfort, risk appetite is your comfort level with risky/volatile investments. If your investment drops 30% in a bear market, are you confident enough that the risk will be rewarded?
Risk appetite is the physical and psychological ability to remain confident and comfortable with investments that may be volatile. Someone with a low-risk appetite finds security in municipal bonds, as they are seen as they safest investment, whereas someone with a higher risk appetite may be willing to purchase an individual stock and hold it through severe volatility with absolute comfort.
Stock simulators shed a perfect light on your risk appetite, because if you aren’t willing to invest fake money into a security, you certainly shouldn’t be investing your real money into it. Beyond that, it can create more comfort in your ability to invest, naturally bringing about a higher risk appetite and ability to hold more profitable investments.
Stock Simulators Show the Importance of Wise Investment Decisions
Stock Simulators are real in the sense that they track the true market, giving a perfect example of what would have happened had you made your simulated decisions in real life. This further exemplifies the importance of making wise decisions. Do not treat a simulator as a game and the money as fake. Try to treat the simulator with the whole weight of the real stock market.
In investments there is a unique conundrum. Bad decisions don’t always lead to poor results, and good decisions don’t always lead to higher returns, but wise decisions are the ones that keep you safe regardless of good or bad choices you make.
“What does that even mean? Isn’t a good decision a wise decision?”
When it comes to investing, not exactly. Wise decisions come from knowing yourself, knowing your limits, and having an investment plan. It would have been a good decision to purchase Microsoft at its inception, but it wouldn’t have been a wise decision. The company had no basis for a retail investor to see that it would become one of the world’s largest companies. Its financials didn’t show what it would be 10-15 years later. Would that investment have been great? Yes. Would that investment have been wise? Maybe not.
Wise investment decisions are decisions that you proactively make to benefit your long-term investing goals. What are those decisions? Well, they can only be decided by you, but a stock simulator can help you find it out.
Well, I’m Still Poor
Unfortunately, I never purchased that stock (AMR), but the lessons it taught me have guided my college finances, allowing me to comfortably analyze investments, study finance, and build a wiser foundation.
If you are a high school or college student interested in investing, a stock simulator may be the way to go for you. It will allow you to expand your knowledge on investing, grow your risk appetite, and potentially make you a wiser thinker along the way.
Even though my best investment never happened, doesn’t mean yours can’t. Go out there, be smart, be secure, be wise, and get started on your investment journey.
That’s all I have for you in the article.
Until the next time.
