What is contra ?

Contra is the buying or selling of stocks without having to pay for the cost of the stocks. Once you buy the stocks on contra, you will have to sell the stocks after a period of time. At the end of that period, you will have to pay for the difference between your initial buying price and selling price.

Currently, the period of time offered by the local brokerages to settle your payment and pay for the difference between the initial buying and selling price is 3 days although the period of time can be extended depending on your relationship with your broker, credit record and the frequencies of trades that you carried on with the brokerage.

For example, you bought 2 lots of SGX at a price of $5.00 on Monday which is also known as T+0. 3 days later which is on Thursday, also known at T+3, you will have to sell those 2 lots of SGX which you bought on Monday. Assuming you sold those 2 lots of SGX at a price of $5.20 on T+3, your profit before brokerage fees would be ($5.20 – $5.00) * 2 lots * 1000 shares =$400 since 1 lot is equal to 1000 shares and you will not have to pay for the cost of buying the 2 lots of SGX which before brokerage fees is $5.00 * 2 lots * 1000 shares = $10,000.

However, if you sold those 2 lots of SGX at a price of $4.80, you will have to pay for the losses since your selling price is lower than your purchase price. Thus your loss before brokerage fees in this case is ($5.00-$4.80) * 2 lots * 1000 shares = -$400.

Contra can be dangerous when there is a sudden unexpected market movement and you do not have enough funds to pay for it. Let us consider the following case with reference to the previous examples. For example, on T+3, the price of SGX suddenly plunge to $3.50 and you have no choice but to sell it at this price. Thus your loss before brokerage fees in this case is ($5.00-$3.50) * 2 lots * 1000 shares = -$3000 and that will be disastrous if you do not have the funds to pay for it.

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