What Is Contra Trading, The Risk Involved, And Why Some Investors Find It Attractive
You can trade without any upfront cash but it’s vital to understand the risks involved.
In the world of investing, there are various strategies to approach the markets. One such strategy, sometimes used by investors looking to trade the market in the short term, is contra trading.
Contra trading involves buying and selling shares within a short period, typically within a few days, without having to fully pay for the shares upfront. Instead, the investor has a certain number of days to settle the payment, during which they can sell the shares to potentially profit from price movements. The profit (or loss) is the difference between the buying and selling prices.
The Benefits Of Contra Trading
The primary benefit of contra trading is its potential to generate returns without requiring upfront cash.
Since some brokerages give you a few days to settle the payment for the stocks you buy, you can technically buy and own the shares (at least for a few days) without needing to pay for them immediately. Think of it as similar to using a credit card: you pay for an item with the card, but the actual payment is only made when the credit card bill is due. However, unlike a credit card, where you must pay for the product if you sell your shares before the trade settlement is due, you don’t have to pay for them unless there are losses incurred.
If the trade goes as planned and the stock price rises, profits are made after accounting for commission fees. This potential for outsized gains is a major draw for investors seeking to maximize their returns in a short period. Additionally, contra trading offers increased flexibility compared to traditional investing. Its short-term nature enables investors to enter and exit positions quickly, potentially capitalizing on short-term price fluctuations. This flexibility can be particularly appealing in volatile markets, where quick decision-making can be crucial.
Contra trading sounds enticing, but what are the risks involved?
The use of borrowed funds in contra trading can be a double-edged sword. While it can amplify profits if the market moves in your favour, it can also magnify losses if it turns against you. In such cases, you are responsible for covering the full extent of the losses, not just the amount you initially invested.
If the market declines and you cannot sell the stocks at a profit or at least break even before the settlement date, you are faced with two less-than-ideal options: you must either provide the cash to settle the trade or incur a forced sale at a potentially unfavourable price. Neither option is ideal, and this risk underscores the importance of understanding the potential downsides of contra trading. Would-be contra traders must be mindful of these risks and have a solid risk management strategy in place when engaging in such trades.
Access Contra Trading Through Tiger Brokers’ Cash Boost Account
With the Cash Boost Account, investors can trade stocks and exchange-traded funds (ETFs) in the United States (US), Singapore, and Hong Kong (HK) markets, up to S$20,000 in buying limit. There is no cash or collateral required to gain access to these interest-free funds.
Tiger Brokers, a popular online brokerage platform, offers contra trading services through its “Cash Boost Account.” This account allows investors to start trading without depositing funds upfront. You can open an account seamlessly using Singpass and begin trading stocks and exchange-traded funds (ETFs) in the United States (US), Singapore, and Hong Kong (HK) markets, with a buying limit of up to S$20,000. Notably, no cash or collateral is required to access these interest-free funds.
With the Cash Boost Account, stocks bought on a particular trading day can be sold anytime before or on the forced selling date itself. For the Singapore and HK markets, investors have until the 5th trading day (the Contra Period) to perform a corresponding sell trade (Contra Sell) before the forced selling date. For the US market, this period is until the 4th trading day. If the sale results in a profit, the investor keeps it. However, if the sale results in a loss, the investor must cover the difference by depositing funds into the Cash Boost Account.
If traders wish to hold onto the purchased stocks beyond the forced selling date, they must ensure the full purchase amount is paid before that date to settle the transaction.Below is an example of a timeline shown for the Singapore and HK markets using the Cash Boost Account.
Source: Tiger Brokers
Fees-wise, the Cash Boost Account offers competitive pricing with a minimum commission of S$4.99 per order.
Contra trading can be an attractive tool for traders looking to amplify their gains. However, it’s crucial to remember that the potential for higher returns also comes with increased risks. If prices move against you, losses can be significant. Therefore, it is vital to have a solid investment strategy before engaging in contra trading.
Understanding the associated costs, such as brokerage fees and potential interest charges, is essential, as these can eat into any profits. Additionally, being prepared for potential losses is crucial, as not all contra trades will result in gains. This cautious approach will help ensure that you are prepared for all possible outcomes in your trading activities.
Check out more details on contra trading and CBA
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
