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How to Build a Paper Portfolio

By Charles Hopkins Published 09/19/2006 | Entrepreneur

Stock trading can be risky business; the cynical amongst us often call it gambling. Of course, if you follow the right newspapers and magazines, it becomes more like a game of backgammon than a game of dice. The seemingly random element still exists, but you can make educated guesses about where the money will be and where it won't. So a certain element of skill does exist in trading stocks, despite popular belief. But how to practice? How do you acquire the skills you need to handle the roiling ocean of the stock market?

Paper portfolios are the best way to be involved in the stock market without actually risking your hard earned cash. Research the type of businesses you want to invest in, find out who's doing well, or who looks like they're about to well. The Wall Street Journal and CNN's business page are probably the best places to start. You'll also want to start following NASDAQ and AMEX reports, as well as the OTC Bulletin Board, which will list stocks that you generally won't find on the other arterial-vein stock reports.
 
Now that you have access to most of the basic information that all the other stock investors use, you can start to work on your portfolio. What are you doing, exactly? The same thing you might have done in a high school economics class: assigning yourself a certain amount of stock shares and then recording how much money you would have invested and then just following the stock market like everyone else.
 
The first rule for investing in the stock exchange, whether with real money or in your paper portfolio is called diversifying. This is a simple concept, really; it means not to keep all of your eggs in one basket.  If you've invested in one stock, and that stock has a bad week, then your investment is shot down the tubes. Every single egg breaks. But if you invest in sixty-seven different stocks, and twenty of them fall through, but the rest all stay even or do well, then you've made a profit, despite twenty bad choices.
 
This doesn't mean to just invest in different companies in the same industry; it means to invest in companies that aren't competing with each other. Why invest in Microsoft and Apple? You're just competing with yourself! But if you invest in Microsoft and Nike, one could fall off the face of the planet without really affecting the other. One famous stock investor lost over two million dollars investing in US Airways, but he was still in the black because he diversified.
 
So give yourself a realistic spending limit. Keeping it realistic for yourself will make it easier to make the adjustment to dealing with real stocks, once you're ready to graduate away from your paper portfolio. If nothing exceptional is happening with any of the companies you've chosen, invest to your spending limit evenly across the board. (Of course, if you have a good feeling about the Denmark Pie Company, you'll want to put just a little more into it.) Keep the record of your trades written down on paper or inside a simple text file and follow the gains and losses. Once you've gotten it down so that you're making money with your investments, you'll be ready to get your feet wet with the real thing.