| One of the most popular trading strategies in the stock market is contra trading. The impression among investors is that in contra trading you can make money without actually spending any of your own. For someone new in the stock market, contra trading is a speculative technique where investors try to take advantage of Bursa Malaysia’s T+3 settlement period to quickly buy and sell the same shares with the hope of making a profit. The technique is simple in theory but risky in practice. Contra trading is a trading privilege not given to all investors by stockbroking companies. Since it is a risky business, investors should evaluate carefully before accepting any contra trading offer from their stockbrokers.
How it is done
Contra trading is a “buy low, sell high” trading strategy where an investor places an order for shares he anticipates will increase in price and intends to sell those shares when the price actually increases. Read the story about Mr Leenson to understand further. Mr Leenson makes profit
Mr Leenson is an avid stock market investor. Due to his good trading record, his stockbroker offers him contra trading privileges, which he immediately accepts. Soon after, Mr Leenson buys 1,000 Telefon Bhd (Telefon) shares at RM10 per share because he thinks its price will go up the next day. His prediction is confirmed when Telefon Berhad’s share price surges to RM10.40 per share at the opening of the market the next day. Mr Leenson quickly sells the 1,000 Telefon’s shares he had bought at RM10 per share.
In normal trading, Mr Leenson would be required to pay RM10,000 (before the transaction costs) for the shares on T+3. But, since it was a contra trade, he did not have to pay for it but instead he received the difference between the purchase price and the selling price of the shares i.e. the contra profit of RM400.
| RM10,400 (sell price) – RM10,000 (buy price) = RM400 (contra gain before transaction costs) |
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