Corporate actions are a frequent occurrence in the Australian Market. Typically your CFD position will mirror the corporate actions associated with owning the underlying share. Holders of a CFD position can participate in Corporate actions, including share 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 rather select an option which will be applied to all of their clients open CFD positions.
A stock split is corporate action that involves dividing the number of existing shares on issue into smaller parcels. Stock splits result in an increase in the number 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 share 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 share over which your CFD is based undergoes a stock split the price will usually fall in proportion to reflect the an increase in the number of shares on issue. Your CFD provider will also adjust the number of CFDs you own meaning that you will be in the same financial position as owners of the underlying stock.
A rights issue is an offer to existing shareholders in a company to purchase additional new shares. Rights Issues involves issuing shareholders new securities called "rights", which give them the right to purchase new shares at a discount to the market price at a date in the future. Essentially the company is offering shareholders an opportunity to increase their shareholding at a discounted price.
Until the date at which the new shares can be purchased, shareholders can trade the rights, in much the same way as the shares themselves. The rights issued have a value which is determined by the market to compensate existing shareholders for the dilution of the value of their shares.
When the underlying share over which your CFD is based undergoes a rights issue, owners of the CFD position also receive rights that are tradeable in the same way as the rights issued to shareholders. There may be certain circumstances where your CFD provider will simply credit your account with the cash value of the rights on their last of trading or simply allow you to purchase additional CFDs at the price attributable to owners of the rights.
Before you start trading CFDs it is important that you understand how corporate actions can affect your CFD positions.
You can learn more about CFD trading in our free CFD Guide.
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