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 however in certain situations where a corporate action involves a number of options your CFD provider won’t let you decide but will rather pick an alternative which will be applied to all of their clients open CFD positions.

A stock split is a corporate action that involves dividing the quantity of existing shares on issue into smaller parcels. Stock splits lead to an increase in the number of shares on issue by a specific multiple however the overall 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 primary reason why stock splits occur is because a company’s share price has increased to a point making them too expensive for traders to afford.

When the underlying share 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 will also adjust the amount of CFDs you own meaning that you’ll 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 involve issuing investors new shares called “rights”, which give them the right to acquire new shares at a discount to the market price at a date in the future. In essence the company is offering shareholders an opportunity to grow their shareholding at a reduced price.

Until the date at which the new securities can be bought, 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 current shareholders for the dilution of the worth of their securities.

When the underlying share over which your CFD is based undergoes a rights issue, owners of the CFD position also receive rights which 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 day of trading or simply permit you to buy added CFDs at the purchase price attributable to owners of the rights.

Prior to you start trading CFDs it is important that you realize how corporate actions can have an effect on your CFD positions.