Given a choice, everyone would choose to purchase something that we already want at a lower price. While not many of us may be practicing it today, we can also buy stocks for less than their existing price.
That being said, here are 4 ways we can buy stocks, while paying less than its full trading price. Exercising such strategies are usually fraught with risks, and you should re-read everything if you’re not an experienced hand.
Read Also: Beginner’s Guide To Shares Trading: What You Need To Know To Become A Better Trader
#1 Buy Stocks On Contra Trading
Contra trading happens when we buy a stock to sell away a few days later, before we need to pay for the trade. This way, we are able to buy stocks – with the intention of making a quick buck or loss – without actually having the funds to pay for it (or incurring additional interest/transaction cost).
This strategy is usually used when we have little intention of owning the stock. Often, it’s simply because we see a trade set-up that will potentially pay off. Thus, we never have to pay its price.
The horizon for such trades is extremely tight. Currently, the Singapore Exchange (SGX) has a 2-day trade settlement window. This means we have to pay for stocks within two days of buying it. This was cut from a 3-day trade settlement requirement in 2018. Depending on the individual broker that we use, we may potentially find slightly more leeway with them.
For example, we buy $25,000 worth of Genting Singapore shares for $0.73 on 8 October 2021, and sell it for $0.76 on 12 October (T+2 day settlement including weekend). Without having to cough up any cash, we would earn a return of 4.1% or $1,025.
#2 Buy Stocks On Leverage (AKA Margin)
When we buy stocks on leverage, we are simply borrowing money to buy more stocks. When employing such a strategy, we may or may not want to hold on to the stocks for the long-term. For example, we could want to own the stocks for its good dividend distribution in the long-term or we could just want to increase our exposure because we see its price rising in a relatively short period of time. Even if we are intending to sell on the stocks in a relatively short period of time, the timeframe is not going to be as tight as a 2-day trade window that is required on contra trading.
For the benefit of employing such an investment strategy, we usually incur an interest cost that will eat into our returns. We should also note that our risk exposure is magnified. If the stock price drop, we may be required to pay up some of its value. If we do not have enough funds, our holdings may be forced sold for the brokerage to recover its funds.
Read Also: Should You Ever Borrow To Invest In Stocks? Here Are Some Things You Need To Consider
#3 Sell Put Options
One increasingly popular way to buy stocks at a discount is to sell a put option. If you’re not familiar with the term – this really means it may not be something you want to jump into without more understanding.
A put option is a contract giving the buyer the right, but not the obligation, to sell a stock before a certain expiration date. Those who buy put options may be doing so because they either want a form of “insurance” against sliding prices or to magnify their own trading exposure when they think that the price of the stock will fall.
When we sell a put option, someone has the right to sell to us a stock at a lower price. By doing so, we also earn an upfront pay-out.
For example, we want to buy Apple shares, but think that the current price of US$151.28 is higher than we want to pay. We wish to buy it for US$145. Instead of keying in a trade at US$145 which may never get fulfilled, we can sell a put option at US$145 that expires in one week. By doing so, we get a pay-out of US$29 per 100 Apple shares.
That’s also the other thing we need to note. On many platforms, such options are typically in increments of 100 shares. Thus, when we sell a put option for Apple shares, it has to be for a minimum of 100 Apple shares – which will be worth US$14,500 at US$145 a piece.
As you can tell, the $29 upfront payout we receive may not seem like a lot. Nevertheless, instead of just keying in a buy trade that may never be fulfilled, selling a put option will give us a cash payout whether the trade is executed or not.
If, within a week, Apple’s share price hits US$145, we are now obligated to buy 100 Apple shares at $14,500. If its shares do not go below US$145 in the next week, then we get to keep the US$29.
One risk here is that if Apple’s share price plunges in a very short span of time. Then, we would be obligated to buy shares at a much higher price and be sitting on heavy losses. If we did this simply to earn the US$29 payout rather than because we believe in Apple stocks, then it would be something of a disaster.
#4 Buy CFDs
CFDs or Contract For Differences is a type of derivative that derives its value from the performance of an asset. Unlike the previous examples, buyers of CFDs would not actually own the underlying stock, but own the price difference – whether positive or negative. As with the majority of CFD trades, there is usually also leverage involved – which magnifies our risk exposure.
If we think that stock prices are going up, but are unable or do not want to buy the underlying stocks, we can go long on a CFD. If the stock price increases, we earn the difference between the price we purchased at versus the price it is trading at.
When doing this, we do not have to pay the stock price to gain exposure to fluctuations in the stock price. We just have to purchase a CFD, incurring a commission and financing cost, which will give us exposure to the stock price difference.
Similarly, we can also sell CFDs if we think stock prices are going down. We can actually use this strategy to hedge our risk when we think stock prices may dip but do not want to sell our underlying investments.
Read Also: What Are The Advantages & Disadvantage Of Trading Using CFDs
Enjoy The Benefits, But Heed The Investment Risks
The methods we’ve covered above are not loopholes or hacks. They are legitimate trading strategies that we can use to get stocks we want to buy without paying full price. But we should also note that these products are being used by other market players for other reasons.
As mentioned above, if we are uncertain about the outcomes, we should find out more before jumping into such trades. The risk can be much higher than we think or want to hold. The execution can also be tricky – as was the case when a 20-year old trader in the U.S. took his life believing he lost over US$700,000, when he may not have been losing money at all.
If we understand what we’re doing, we can also increase our returns without having to bear much more risk than we already wanted to in the first place. Finally, as with any financial transactions, there will also be a small brokerage or trading fee that we incur. If we don’t fully understand this, we should find out more as well.
To learn more about investing and trading, and the latest happenings in the financial world, you can join our 3-day Welcome To Wall Street #TheNewNormal virtual event from 10 to 12 November (Wednesday to Friday), 12pm to 1.30pm. In particular, Day 2 (Thu, 11 November) will feature Desmond Leong, CEO of Everest Fortune Group, who will talk about Technical Analysis VS Fundamental Analysis; and Rayner Teo, one of Singapore’s most-followed traders, who will give us insights into how we can buy companies at great discounts. Finally, send in your questions as I chat with both of them to uncover their thoughts on managing risks when investing in different asset classes.
Registration Link: https://dollarsandsense.link/welcometowallstreet_day2_registration
Join us for all 3 days if you can, as we bring to you 9 keynote speakers and panelists who will be sharing some of the most important and trending topics right now in finance. Find out more about the event on our Facebook page.
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