Contra Trading

From Financial Literacy Wiki

Contra Trading is for the more advanced and cash strapped individuals to carry out. It is a trading method that allows the sophisticated investor not to commit any of his own capital.

Basically a contra trade is one in which an investor offset a previous share purchase with an equivalent sale within a stipulated time, currently for Singapore Stock Exchange, is three market days. As an illustration, suppose an investor bought 1000 DBS shares on Tuesday at $19.50 per share. He can offset his purchase by selling the 1000 DBS shares on or before Friday, assuming there are no public holiday in the middle of this period.

By doing this, he does not need to fork out any capital for the purchase transaction. He will profit from this contra trade if the price that he sells is higher. His profit will be the price differential between the purchase and selling price, net off transaction charges. For instance, if he traded online and sold the 1000 DBS share at $20.50, his profit would be around $940.

Although the idea of profiting without using one's own capital sounds attractive, the associated risk is very high. Such trading strategy works if the stock prices rises significantly within three market days. Otherwise, the investor might end up with losses due to transaction costs (from both buy and sell transaction). What is worse is when the price actually declines, which means the investor has bet wrongly the direction, he would suffer capital loss on top of the transaction costs.

A close attention to what economic indicators are being announced and the general market sentiment can help in making the right decisions.