Learning how to invest is as important as budgeting for those seeking financial independence. As one form of investor education, practice accounts are a no-risk, cost-free way to gain some hands-on experience. These accounts hold pretend money that allows users to build a portfolio and observe how its total value and the value of specific holdings change over time.
"Practice accounts provide a fun and interactive way for anyone to build and enhance their investing knowledge, or try different investing strategies," says Stacey Petersen, vice-president, RBC Direct Investing. They're of interest, she adds, not only to beginners but also to seasoned investors who want to practice new techniques such as options trading.
RBC practice accounts start off with $100,000 of pretend money. With these imaginary amounts, users can trade stocks, exchange-traded funds, mutual funds and fixed-income securities.
"Our practice accounts are not a demo experience, but are integrated into the actual RBC Direct Investing site," says Petersen. "The practice account will simulate the experience of an actual purchase, from order entry to receipt of the investment."
Several bank-owned discount brokerages provide practice accounts to clients. Along with RBC, they include TD Direct Investing's Papermoney application and Scotiabank's iTRADE platform.
"Client education is a key value proposition for iTRADE, along with platforms and service," a Scotiabank spokesperson told Morningstar. "The practice account is the perfect example of a learning tool for self-directed investors."
Discount brokerages aren't alone in offering practice portfolios. Morningstar's portfolio tool and Yahoo Finance's website allow users to simulate trading.
In order to use a practice account, you will need to be a client or registered user, or open a new account. In the case of bank-owned discount brokers, you may need only to have some existing relationship with the bank. The Morningstar.ca portfolio tool is available only to Morningstar registered users.
Jeremy Rogers, who now works in the investment industry, looks back fondly on how practice accounts helped him get started in investing. While in high school, he and his peers used a service called Updown. "Part of the goal was picking companies and seeing how your mock portfolio did," he recalls. "I did it on my own as a way to compete with them or just have some fun."
In building his practice portfolio, Rogers looked for companies that he "liked the stories behind and, most importantly, that (provided) a service that I could see myself using."
As Rogers points out, while this type of strategy was fine for a practice account, it doesn't make sense when money is on the line. When building a real portfolio, you need to pay attention to portfolio diversification and risk management. "As a paper trader, your idea of risk and risk tolerance really aren't there," Rogers says.
Now an associate with Caldwell Investment Management Ltd. in Toronto, Rogers says his education from practice accounts "prompted me to take a leap forward, go to the bank and say 'I would like to open an account and I don't want you to do this (entirely) for me.'"
Investors like Rogers realize that while practice accounts can be useful for a time, they're no substitute for the real thing. The longer that you put off building a real portfolio, the more likely that a practice account will delay real savings growth.
Nor does making the transition from practice accounts to real-life investing require a huge commitment of time. "Some people think that it's either 'I hire someone to (invest my money) for me, or I'm there in the trenches reading every earnings report.' It doesn't have to be like that," says Rogers. "It's always a good idea to have a part of your portfolio allocated to something like mutual funds, where you do have an active or passive manager who has been through the industry and (has) access to a lot of tools."
But if you invest directly in stocks, you'd better be willing to do your homework on a continuing basis. After picking your portfolio's holdings, make sure to keep up on new developments and earnings trends. There are numerous sources of information on publicly traded companies, including their own websites. On Morningstar.ca, getting access to information on North American-listed companies is as simple as entering a company name or stock symbol at the top of the home page.
