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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"Once you buy the stocks on contra"
ReplyDeleteFor the above statement, i think i have the need to explain in detail.
When you buy a stock, you cannot buy on contra.
Contra by meaning is sell before settlement.
Thus it's only meant to be for sell order, not buy order.
So the biggest risk of doing contra is not about the contra loss.
It's when you buy China Avi Oil (example), then before you can contra off, it's being suspended.
This case will led you to pay the full amount of the buy contract. Failure to do so will led to legal action by the brokages house. And you cannot argue that you only want to buy on contra, sorry no such things.
It's just like you buy an apple at $1, but if within the credit preiod, you managed to sell at $1.10, then you can profit the $0.10 gain.
However, if upon you buy the apple, and the apple rots in your hand and you spoilt it. Then of course you still need to pay the seller of $1 that you pay for the apple.
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ReplyDeleteHi,
ReplyDeleteThanks for adding on to the contents of my post with more information. You are right in saying the biggest risk is when the counter is suspended before you can contra off. This situation didn't come across my mind when I was writing this post.
Kay
I am a new player who trades using POEMS. This automatic T+3 settlement date sometimes brings problem to me:
ReplyDeleteIf I buy Share A on T+0, and then Share B and Share C on T+1, I sometimes run out of "buy limit", which prevents me from buying more share - regardless of how much cash balance I have in the account. For those who contra, it's a good thing. For people like me who buy what they intend to pay and keep, it's not so good.
I am not sure if I am able to quickly pay off my outstanding purchase so that I can continue my buying spree.
Hi beng,
ReplyDeleteI understand your concern. What I suggest is that you can call up your broker or trading representative and ask them to increase your buy limit. This should solve your problem.
Kay
Hi Beng,
ReplyDeleteI'm having a doubt, not sure if you can help.
I try to perform a 'sell' on a counter which I have bought sometime back. However, I selected the "Contra" option accidentally.
Would this be of any issue? my intention is to sell of the stock that i have bought previously.
Thank you.
Thomas
Thomas, when we tick the contra box to sell outstanding shares (i.e., shares that we have yet to pay for), and the order gets executed, it will reset our buy limit.
ReplyDeleteBy ticking the contra box after settlement date, I don't suppose it matters. You can give your trade representative a call or email him. Note: they are supposed to help you. I find them helpful.
what is sell contra?
ReplyDeletewhat is sell contra?
ReplyDelete