When trading Share CFDs (Contracts for Difference), it’s essential to understand the role of corporate actions and their impact on your trades. Corporate actions such as dividends, stock splits, rights issues, and mergers can influence the price and performance of shares—and by extension, the value of your CFD positions. While you don’t own the underlying shares in CFD trading, these actions still have significant implications for your positions.
This guide explains how corporate actions work and what they mean for your Share CFD trades.
What Are Corporate Actions?
Corporate actions are decisions made by a company’s board of directors that bring about changes to its stock or capital structure. These actions typically aim to benefit shareholders by increasing shareholder value, raising capital, or improving the company’s market position.
For CFD traders, corporate actions don’t involve ownership rights, such as voting privileges, but they do affect the price of the underlying asset, which in turn impacts your open positions.
Common Corporate Actions and Their Impact on Share CFDs
Dividends
Dividends are payments made by a company to its shareholders, typically from profits. In traditional share ownership, shareholders receive these payments as a direct benefit. For CFD traders, however, dividends result in an adjustment to your trading account:
- Long Positions: If you hold a long position, you’ll receive a credit equal to the dividend amount, reflecting the benefit of holding the position during the dividend payout.
- Short Positions: If you’re short on Share CFDs, the dividend amount will be debited from your account since you effectively owe the dividend.
Stock Splits and Reverse Splits
Stock splits increase the number of shares outstanding while reducing the share price proportionally, making the stock more accessible to investors. For example, in a 2-for-1 stock split, each share is divided into two, and the price is halved.
- Impact on CFDs: The number of CFD contracts you hold and the share price are adjusted proportionally, leaving the overall value of your position unchanged. A reverse split, which reduces the number of shares and increases the price, works in a similar way.
Rights Issues
A rights issue allows existing shareholders to purchase additional shares at a discounted price to raise capital for the company. While this can dilute share value temporarily, it provides an opportunity for shareholders to increase their holdings at a lower cost.
- Impact on CFDs: For CFD traders, brokers typically adjust the value of your position to reflect the dilution caused by the rights issue. This adjustment ensures fairness and aligns your position with the new market dynamics.
Mergers and Acquisitions
Mergers and acquisitions (M&A) occur when two companies combine or one company acquires another. These actions can cause significant price volatility as markets react to the perceived benefits or drawbacks of the deal.
- Impact on CFDs: If you hold a position in a company involved in M&A activity, your position may be adjusted to reflect the terms of the deal. This can include changes in share price, ticker symbols, or even the replacement of your position with new contracts in the merged entity.
Spin-offs
In a spin-off, a company separates a portion of its business into a new entity, distributing shares of the new company to existing shareholders. Spin-offs can affect the parent company’s share price and trading dynamics.
- Impact on CFDs: Brokers may make adjustments to your CFD position to account for the spin-off, ensuring your trade reflects the new structure and value of the parent company.
Corporate actions are an unavoidable aspect of Share CFDs. Whether it’s dividends, stock splits, or mergers, these events can influence your positions in ways that extend beyond standard price movements. By staying informed and understanding how your broker adjusts for corporate actions, you can navigate these events confidently and minimize disruptions to your trading strategy. Successful CFD trading isn’t just about predicting price movements—it’s about adapting to the dynamic nature of the market.