Contra Trading and Margin Trading

The stocks in Singapore took a huge tumble yesterday. The Straits Times Index (STI) dived 4% or 127.87 points on Wednesday 28 February 2007 to 3,104.15. This is the largest one-day drop in 20 years. The index lost 6% since last Friday 23 February 2007 record close of 3,310.44.

Reality on the uncertainty in the stock market hits home, though the signs of the sudden drop in a particular day may not be so obvious.

The retail stock traders who buy and sell shares on contra1 would be affected adversely with such a sudden and sustained movement in the overall stock market.

1 Contra – Those who buy and sell within a 3-day period without having to put cash up front and make on the difference in buying and selling price of a stock. They do not own the stock and do not intend to take possession of the stock they purchased.

Another group of stock traders are margin traders. They too suffered when share prices fall significantly. They have borrowed funds (loans) on the collateral of their portfolio of shares, to trade in the stock market. When the portfolio of shares lost values because of the sudden drop in share prices, the stock broking firms or lenders will do a margin call for the stock traders to top up their margin accounts or if the stock traders cannot top up with their own cash, they have no choice but to sell the stocks (at unfavourable prices) in order to cut further losses.

Are these too much a risk to take?

Written on 3/1/2007 6:52 PM

Copyright © 2007, the author known as LKT in Singapore.

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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