Part 2: Contra Trading Simulation
Contra Trading Simulated… just for you!
Gerald is making his 1st stock using his Contra Account. He...
Computation of collateral: RM1,000 (from his cash) + RM4,000 from his Nestle shares (20% haircut for Main Market shares) = RM5,000.
Armed with a collateral value of RM5,000, he’s ready to purchase Top Glove (TG) and Mah Sing (MS). Based on the screens below, TG & MS have a multiplier effect of 5X and 3X respectively.
If Gerald chooses to buy TG first, his trading limit will be RM25,000 (5X of RM5K). That means, he can buy up to RM25,000 worth of TG shares!!! But he’s not much of a risk taker, so he only buys RM10,000 worth of TG shares.
We now calculate his NEW collateral value.
Utilized collateral for TG purchase = Purchased Amount / Multiplier
New collateral value = RM5,000 – RM2,000
With his new collateral value, he can buy MS with a purchasing power of up to RM9,000 (3X multiplier).
Just like any other credit cards, Gerald has to settle his credit card debt after a period of time…
Why yes! You gotta do the same as well when you trade via the Contra Account – except you don't.
How to settle your credit card debt contracts?
The period of time offered by Bursa to settle your payment is two working days. The day Gerald’s TopGlove order is matched, we call T0 (or Day Zero). The day Gerald has to settle his payment is T2 (two working days after T0).
Now here comes the decision-making part. Unlike credit cards, Gerald has the option of NOT paying in full his Top Gloves shares
Deposit RM5,000 into his Contra Account. Now his cash balance is RM10,000 (remember his initial cash balance was RM5,000?).
Perform a manual pickup before T2, 5PM. [steps here]
And voila! Now the Top Glove shares will stay in his Contra Account until he decides to sell them off in the near future.
Sell Top Glove shares before T2, 5PM. So long as it’s matched, no topping up of the account is required. It’s that easy! In other words, Gerald bought and sold Top Glove without paying for it.
Contra Gain – This is if at the point of sale, there was a profit made. Gerald gets to keep these profits if his selling price is higher than his buying price.
Contra Loss – This is of his selling price was lower than his buying price. If it’s insufficient, he’ll need to top up the difference.
With Great Power Comes Great Responsibility.
Now that you know Contra trading provides you perks to help you level up on your trading skills, it also comes with additional risks.
Remember this golden nugget.
As an investor/trader, you must be careful that you don’t buy more shares than you can afford, as the market can be volatile. While we advocate you to continuously improve your investment position, we certainly don’t want you to over trade beyond your means.
Our advice :
- Contra trading is relatively short term – so monitoring is needed.
- Set your risk reward ratio first before you trade.
- Learn how to read technical analysis’ will help in your contra trading.
- Determine your exit price before trading.
For more info on Contra Trading, visit our FAQ page!
Part 3: Day Trade with Contra Account (Coming Soon!)