Corporate actions are prevalent in the Australian market. Typically, your CFD position will reflect the corporate actions associated with ownership of the underlying share. Holders of a CFD position may engage in corporate actions, including stock splits and rights issues; however, in certain circumstances where a corporate action involves a number of options, your CFD provider may not allow you to choose, but will instead select one option which will apply to all of your clients opening CFD positions.
A stock split is a corporate action that involves dividing the existing number of outstanding shares into smaller parcels. Stock splits result in an increase in the number of shares in issue by a specified multiple; however, the total dollar value of the shares remains the same as the value before the stock split, this is because no value has been added as a result of the stock split. pull apart. The main reason stock splits occur is because a company’s stock price has risen to a level that makes it too expensive for investors to afford.
When the underlying stock on which your CFD is based undergoes a stock split, the price will generally fall in proportion to reflect the increase in the number of shares in issue. Your CFD provider will also adjust the number of CFDs you own, meaning you will be in the same financial position as the owners of the underlying shares.
A rights issue is an offer to existing shareholders in a company to buy additional new shares. Rights issues consist of issuing new securities called “rights” to shareholders, which give them the right to buy new shares at a discount to the market price at a future date. Essentially, the company offers shareholders the opportunity to increase their shareholding at a reduced price.
Until the date on which the new shares can be purchased, shareholders can trade the rights, in the same way as the shares themselves. The rights issued have a value that is determined by the market to compensate existing shareholders for the dilution of the value of their shares.
When the underlying share on which your CFD is based undergoes a rights issue, the owners of the CFD position also receive rights which are tradable in the same way as rights issued to shareholders. There may be certain circumstances where your CFD provider will simply credit your account for the cash value of the rights at your last trade or simply allow you to purchase additional CFDs at the price attributable to the owners of the rights.
Before you start trading CFDs, it is important that you understand how corporate actions can affect your CFD positions.