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Traders101.com reproduces this definition here under license for your convenience.

Paper trading is a kind of 'pretend trading'. You should always start by paper trading while you are learning - you will need your real money for later! Paper trading will give a daytrader a good idea of his ability to trade and how likely he is to be successful at trading. While paper trading, a day trader should first become comfortable with identifying potential opportunities and actually how to place paper (aka 'make-believe') trades rather than worrying about profit or loss. Once that kind of level is reached, the day trader can concentrate on creating a consistently profitable P&L. An alternative to paper trading is to use one of the bargain day trading spread betting firms who will allow you to trade for pennies on the point (meaning that you only risk a few dollars, yet get the actual feel of 'real' day trading - invaluable if you want to discover whether the life of a trader is for you while not risking much cash).