Mastering stocks and indices
How corporate actions affect stocks
When you trade stocks, you'll need to pay attention to the actions of your chosen companies. Sometimes, they'll have a direct impact on your open positions.
- What is a corporate action?
- Rights issues
- Mergers and acquisitions
- Stock splits and consolidations
What is a corporate action?
A corporate action is an event initiated by a public company that will affect the shares it has issued. There are many different types of corporate action – but traders mainly focus on those that will affect the stocks' price. Some actions are used to lower a company's stock price, some to raise it using orders to open positions
Let's take a look at the main corporate actions you might encounter as you trade stocks. Plus, how they'll affect you if you have an open CFD position on the company.
We've already encountered the most common corporate action: the dividend.
Used by companies to reward investors with a share of the business's profits, dividends will usually cause a stock's price to fall. Why? Because the company has just parted with a large pool of cash, making it worth less overall.
If you have a long CFD position on a company that pays a dividend, your account will be credited. If you have a short trade, you'll have to pay the dividend.
Just like when investing, the amount you pay or receive will depend on the size of your position. And dividends only apply if you open your trade before the ex-date.
With FOREX.com, dividends will be paid or deducted before the market opens on the ex-date. You'll usually find that the fall in the stock's price on the ex-date will offset the dividend you've received or paid.
Rights issues (sometimes called Secondary Offerings) occur when a company offers new stock to existing shareholders – usually at a discount to their current market price.
Like dividends, rights issues will typically cause a company's stock price to fall. Here, it's because they're diluting the number of shares available on the open market, increasing supply.
Rights issues tend to come with a deadline. You'll have to decide whether to take up the offer before this date.
Open offers vs rights issues
Like rights issues, in open offers existing investors are offered the chance to buy more stock. However, you can’t sell your rights on in an open offer.
Rights issues and FOREX.com
If you have an open CFD position on a company that offers a rights issue, we'll add a new position to your account with a price of 0. What you can do next depends on whether you're long or short on the stock:
If you're long, you can...
If you're short, you can...
Mergers and acquisitions
Mergers and acquisitions are two ways in which two listed companies can become a single stock.
Both can take months or years to finalize – and often fail to go through if terms cannot be agreed. During this period, investors and traders will be able to buy and sell both stocks as normal.
If the consolidation completes, though, one or both of the stocks will cease to exist. What happens next for shareholders is dependent on the terms of the merger or acquisition.
CFDs and takeovers
If you have a CFD position on a company that is subject to a merger or acquisition, then your trade will be closed according to the terms of the deal. We’ll then open a new position of the same value after the takeover.
Say, for instance, that you hold 1000 CFDs on company A, which is trading at $6.50.
Company A is then bought out by company B. The terms of the acquisition state that company A investors will be offered 0.613 shares in B for each share that they own of A.
You would receive 613 company B CFDs. We'll calculate the new price for the CFD to ensure that your trade value remains the same. In this case, $6500.
Stock splits and consolidations
Sometimes a company will attempt to control their stock price to prevent it from getting too high or low. Two common methods of achieving this are stock splits and consolidations.
In a stock split, the company will give additional shares to all existing shareholders. A 2-1 split, for instance, means the number of shares held by each investor is doubled. This should lower the stock's price by increasing supply.
A consolidation, or reverse stock split, does the opposite. Existing shares are merged to reduce supply in an attempt to increase their price. A reverse split may be a sign that a company is struggling and fears being delisted.
CFDs and stock splits
In a stock split, your FOREX.com position will be closed, then reopened to reflect the terms of the split. The objective is to reflect the circumstances affecting the share in the public market.
In a consolidation, we'll compensate you with a cash dividend for any shares that you lose.