Rights Issues And CFDs

By in Money Management on August 1, 2020

Corporate events are a frequent occurrence in the Share Market. Generally your CFD position will mirror the corporate actions linked to owning the underlying share. Holders of a CFD position can participate in corporate actions, including share splits and rights issues though in certain situations where a corporate action involves several options your CFD provider may well not enable you to choose but will rather select an alternative which will be applied to all of their clients open CFD positions.

A share split is a corporate action that involves dividing the number of existing shares on issue into smaller quantities. Stock splits result in an increase in the amount 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 level making them too expensive for investors to afford.

When the underlying share over which your CFD is based undergoes a share split the price will generally fall in proportion to reflect an increase in the number of shares on issue. Your CFD provider will also adjust the amount of CFDs you own meaning that you’ll be in exactly the same financial position as owners of the underlying stock.

A rights issue is an offer to current investors in a company to acquire extra new shares. Rights Issues involve issuing shareholders new shares known as “rights”, which give them the right to acquire new securities at a discount to the market price at a date in the future. Basically the company is offering shareholders a chance to grow their shareholding at a reduced 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 decided by the market to compensate existing shareholders for the dilution of the worth of their securities.

When the underlying share over which your CFD relies undergoes a rights issue, owners of the CFD position also take delivery of 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 additional CFDs at the purchase price attributable to owners of the rights.

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

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