Corporate events are a normal occurrence in the Australian Market. Typically your CFD position will mirror the corporate actions linked to owning the underlying equity. Holders of a CFD position can take part in corporate actions, including share splits and rights issues though in certain circumstances where a corporate action involves various alternatives your CFD provider will not enable you to decide but will rather choose an alternative that will be applied to all of their customers open CFD positions.
A stock split is a corporate action that involves dividing the number of existing shares on issue into smaller quantities. Stock splits result in an increase in the quantity of shares on issue by a specific multiple however the total dollar value of the shares remains the same as the value prior to the equity split, this is because no value has been added as a result of the split. The main reason why stock splits occur is because a company's share price has increased to a level making them too expensive for investors to afford.
When the underlying equity over which your CFD is based undergoes a share split the price will ordinarily fall in proportion to reflect an increase in the quantity of shares on issue. Your CFD provider may also adjust the amount of CFDs you own meaning that you'll be in exactly the same financial position as owners of the underlying share.
A rights issue is an offer to current investors in a company to purchase extra new shares. Rights Issues entail issuing shareholders new shares called "rights", which give them the right to buy new securities at a concession to the market price at a date in the future. Basically the company is offering shareholders a chance to increase their shareholding at a reduced price.
Until the date at which the new shares can be bought, shareholders can trade the rights, in a similar way as the shares themselves. The rights issued have a value which is determined by the market to compensate current shareholders for the dilution of the value of their securities.
When the underlying share over which your CFD is based undergoes a rights issue, owners of the CFD position also take delivery of rights that are tradable in the same way as the rights issued to shareholders. There may be certain situations where your CFD provider will simply credit your account with the cash value of the rights on their last day of trading or simply enable you to buy added CFDs at the price attributable to owners of the rights.
Prior to you start trading CFDs it's important that you understand how corporate actions can affect your CFD positions.
Author Resource:
Marcus Murphie Is a well known CFD trader having traded with a lot of of the worlds biggest CFD providers and investment banks. Marcus Murphie has coached thousands of aspiring traders and has written a number of courses and guides on CFD trading , many of which are available for download free of charge on the web.
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