Demo Accounts: What Are They And Should I Use One?
A Demo Account is a particular type of account that trading platforms* provide. The account is financed with fictitious money enabling the client to trial the trading platform and sample the variety of features available. Once the client is happy with the particular trading platform they can then choose to apply for a real account, which will then be financed by the client’s actual money. There are an array of online trading platforms offering demo accounts, which feature stock trading platforms, commodities exchanges** and foreign exchange trading sites. We suggest your demo account and live account are placed with different trading platforms to prevent an expensive mistake occurring.
Demo accounts started to become popular in the twenty-first century, together with online trading. They weren’t really viable before the introduction of computers and the Internet. Historically, trades were generally recorded on paper, meaning to monitor virtual trades would have been tedious and also costly. This would defeat the main purpose of the demo account’s function to operate for free. Online broker firms began to offer demo accounts during the 2000’s, due to the launch and demand of high speed internet.
Demo Accounts advertise their features to a client, allowing them to utilise these, in the anticipation that the client opens a live trading account with them and they then earn commission from their trades. Demo accounts are more commonly used by newbie traders, as it gives them the opportunity to learn on live markets, but they can also benefit the experienced trader to enable them to analyse new strategies. Students also benefit in using demo accounts (E.g. in a finance or economics class), as it teaches them the principles of investing in the stock market and enables them to monitor their investments during the course. Another benefit being that if you are experienced in investing in stocks you might want to try investing in something new (E.g. commodities). A Demo Account would allow you to practice risk free before you start live trading.
Please note: When investing in commodities, currencies, or futures, they are all affected by different types of market orders and there are different types of margin requirements compared to the stock markets. Hence, the importance to use a demo account to practice and perfect your trading skills.
*Explanation of a Trading Platform:
The trading platform is software specifically designed to be used for trading. It opens, closes and manages market positions via a financial negotiator I.e their online broker. These online trading platforms are generally provided by brokers complimentary or they may be provided at a discounted price on the proviso the client has a funded account or has to execute a certain number of trades within a month. The top trading platforms will offer a variety of powerful features and offer a low commission.
**Explanation of a Commodities Exchange:
Commodities exchange is a legal body that regulates and implements set rules and policies for trading standard commodity contracts and associated investment products. Commodities exchange is also where real trading takes place. The commodities market is vast and they can trade trillions of dollars on a daily basis.
