CMFAS RES 1A Securities Dealing Practices & Skills question: difference between contra trading and margin financing

CMFAS RES 1ASecurities Dealing Practices & Skills

Which is the key difference between contra trading and margin financing?

A Contra offsets a position before settlement with no financing; margin carries a position over time on credit with interest
B Contra is charged interest from trade date until offset, whereas margin loans are interest-free if repaid within a calendar month
C Only margin trades can make a loss, because a contra is always closed at a price agreed before the trade is done
D Contra is available only for short sales and margin only for purchases, so the two facilities never overlap

Show the answer and explanation

Answer: A. Contra offsets a position before settlement with no financing; margin carries a position over time on credit with interest

Contra closes out before the settlement due date so the customer never carries a funded holding — only the net difference settles. Margin financing keeps a funded position over time using the broker's credit, incurring interest and margin obligations.

Common mistake

It is margin, not contra, that charges interest and carries the position.

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