Understanding Corporate Actions
Corporate actions can significantly influence share prices, even if they don’t directly relate to a company’s fundamentals. In this guide, we’ll explore the main types of corporate actions and how they impact CFD and spread betting positions.
What Are Corporate Actions?
Corporate actions are events or decisions made by a company that can have a substantial effect on its shareholders. While some actions, like a company changing its name, may not impact share prices directly, others, such as dividends, can.
Companies initiate corporate actions for various reasons, including:
Distributing profits to shareholders (e.g., dividends)
Modifying share prices (e.g., stock splits, which aim to adjust the share price to a more attractive level)
Undertaking corporate restructuring
We strive to reflect these corporate actions accurately in your trading account.
Types of Corporate Actions
Here’s an overview of the corporate actions you might encounter while trading shares.
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Dividends
Dividends are a well-known corporate action that investors value highly. When a company pays a dividend, it returns a portion of its profits to shareholders, effectively paying you for holding the stock.
Dividends are paid per share, so you receive a specified amount for each share you own. Key dates to remember include:
Announcement Date: When the company declares the dividend.
Ex-Dividend Date: The last day you can buy the stock to be eligible for the dividend. Purchases made after this date will not receive the dividend.
Payment Date: When the dividend is actually paid to shareholders.
On the ex-dividend date, a company’s share price typically drops to reflect the payout, as the company’s overall value decreases.
How Dividends Affect CFDs and Spread Betting
If you hold a long CFD or spread betting position when a dividend is declared, your account will be credited with the dividend amount. Conversely, if you’re short, you will be charged the dividend. This adjustment occurs before the market opens on the ex-dividend date. To receive the dividend, you must hold a long position the day before the ex-dividend date. The drop in the stock price due to the dividend payout generally offsets the dividend received.
- Rights Issues
A rights issue allows existing shareholders to purchase additional shares at a discounted rate, often referred to as a secondary offering.
Rights issues usually lead to a drop in the company’s share price due to the increased supply of shares. Companies typically use rights issues to quickly raise capital, such as to pay down debt.
A rights issue will specify a deadline for purchasing new shares. Before this date, you can trade the rights as if they were regular shares, which helps mitigate the decline in value for shareholders.
How Rights Issues Affect CFDs and Spread Betting
Following a rights issue, City Index will adjust your account based on the new shares issued.
Long traders can:
Sell the rights issue at market price before the deadline
Exercise the rights to acquire new shares at a discount
Short traders can:
Buy back the rights at market price before the deadline
Leave the rights position open after the deadline, which will then be booked as a short position
Note: Short traders cannot exercise the rights issue.
Open Offers vs. Rights Issues
Open offers are similar to rights issues but with one key difference: open offers cannot be traded like rights issues.
- Mergers and Acquisitions
Mergers, takeovers, and acquisitions involve the consolidation of two or more companies into a single entity. For instance, JPMorgan Chase emerged from a merger between JP Morgan and Chase Manhattan.
Such deals can take months or years to complete, during which time shares of the involved companies continue to trade. Once the merger or acquisition is finalized, the stocks of the merged companies may cease to be traded.
How Mergers and Acquisitions Affect CFDs and Spread Betting
Upon completion of a merger or acquisition, any positions you hold in the original company will be closed according to the terms of the deal. Your trade value will remain consistent before and after the transaction. For example, if Company A is acquired by Company B, and you hold CFDs on Company A, you will receive CFDs on Company B. City Index will adjust the value of these CFDs to maintain your original position value.
- Stock Splits and Consolidations
Stock splits and consolidations are methods companies use to adjust their share prices to improve liquidity.
Stock Split: Increases the number of shares outstanding, thereby lowering the share price.
Consolidation (Reverse Stock Split): Reduces the number of shares outstanding, raising the share price.
How Stock Splits and Consolidations Affect CFDs and Spread Betting
In a stock split, your City Index position will be adjusted to reflect the new terms of the split. In a consolidation, the number of shares is reduced, and you will be compensated with a cash dividend to offset the value reduction.
Understanding these corporate actions helps you manage your CFD and spread betting positions effectively, ensuring that you are prepared for their impacts on your trading strategies.