In the last two articles, I showed how you can buy $1,000 of shares and put up only $100. It's called leverage and it amplifies your gains and losses.

--TNP PHOTO ILLUSTRATION: SIMON ANG

If the stock moves 10 per cent, you will gain or lose 0.10 x $1,000 = $100. But as a percentage of your $100 investment, it is a 100 per cent gain or loss. It means you double your money or lose it all.

Popular leverage investments are structured warrants, options, contracts for difference, foreign exchange, futures and stockbroker loans.

One more - a big one - is contra trading. It offers the most extreme leverage since you don't have to put up any money. It only requires that you sell your shares within three days. This is called T+3.

After selling, you settle up with your broker and pay for your loss or collect your profit.

Two rules: T+3 vs T+0

Other markets, like the US, also have T+3 but it means something entirely different.

It means you have three days to pay for the shares but you MUST pay for them by day 3, even if you had sold earlier and no longer own them. You cannot simply 'contra' the gain or loss, as we do here.

US law permits contra trading only for T+0, called 'day trading'. You must buy and sell on the same day AND deposit US$25,000 ($35,000) with the stockbroker.

Can you trade US shares but use Singapore's contra trading rules of T+3 and no deposit? Yes. Simply trade US shares through a local broker.

A risk lurking in contra trading is that every decade or so there is a big stock sell-off. The last huge one was on 22 Oct 1987, when the US market fell 22 per cent in a single day.

A sell-off like that wipes out leveraged accounts. Rules like T+0 and deposit requirements reduce the risk but also reduce trading volume as well as revenues of brokers and the exchange.

It is a dilemma. On the one hand, the Singapore Exchange is a regulator in charge of reducing risks to traders. On the other hand, it is a for-profit company that rewards its managers for profits and punishes them for losses.

Contra trading is expensive

Can you make money by short-term trading? The question has been researched extensively in what is called 'weak-form efficient market tests'.

It shows that short-term stock movements - like over three days - are random events.

Even if you watch the market every second, it won't help. The only thing that might help is if you have special or insider information about a near-term market-moving event. That is unusual and could be illegal in certain circumstances.

A second problem is the cost of all that trading. You must pay the spread plus the broker's commission. This comes to 1.2 per cent for a thee-day contra trade, which is 146per cent on an annual basis (1.2 x 365/3).

That is what you need just to break even. It is almost impossible. Even the top funds don't earn so much.

The extreme leverage, high costs and random price movements explain the many sad contra trading stories you hear about people who couldn't afford to lose, but did.

Doctor Money's Quick Quote:

'Our settlement time frame of trade plus three days (T+3) is in line with those in markets such as the US and UK, and caters to international investors.'
- Mr Muthukrishnan Ramaswami, senior executive vice-president and chief operating office of the Singapore Exchange, in a letter to Business Times on 7 Aug.

CONTRA TRADING: SINGAPORE VS US

SINGAPORE

US

Contra Period

T+3

T+0

Deposit required

None

$35,000

Cost per trade

1.2 %

0.5 %

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