Corporate actions can significantly impact the value of shares, which can affect the traders’ positions in the market. It’s crucial to understand how different corporate actions impact shares to make informed decisions when trading. This article aims to provide an overview of the main corporate actions and how they affect the market.

What are Corporate Actions?

Corporate actions are events initiated by a public company that affect the shares they have issued. These actions can include changes to the company’s capital structure, ownership, or corporate governance. There are various types of corporate actions, such as mergers and acquisitions, rights issues, dividends, and stock splits.

Dividends

A dividend is the most common corporate action that companies use to reward investors with a share of the business’s profits. Typically, dividends cause a stock’s price to fall because the company has just parted with a significant amount of cash, making it worth less overall.

For traders who have a long Contract for Difference (CFD) position on a company that pays a dividend, their account will be credited. However, traders with a short trade will have to pay the dividend. The amount traders pay or receive will depend on the size of their position. Moreover, dividends only apply if traders open their trade before the ex-date.

Rights Issues

Rights issues occur when a company offers new stock to existing shareholders, usually at a discount to their current market price. Like dividends, rights issues typically cause a company’s share price to fall because the number of shares available on the open market increases.

Traders have to decide whether to take up the offer before the deadline. If traders have an open CFD position on a company that offers a rights issue, FOREX.com will add a new position to their account with a price of 0. If traders are long, they can sell the rights issue before the deadline at market price or take up the rights, resulting in a new position at the price of the rights issue. On the other hand, if traders are short, they can buy back the rights before the deadline at market price or leave the rights position open after the deadline, and a new short position will open at the market price.

Mergers and Acquisitions

Mergers and acquisitions are two ways in which two listed companies can become a single stock. During this period, investors and traders will be able to buy and sell both stocks as normal. However, if the consolidation completes, one or both of the stocks will cease to exist, and the shareholders’ next steps will depend on the terms of the merger or acquisition.

For traders who have a CFD position on a company subject to a merger or acquisition, their trade will be closed according to the terms of the deal. FOREX.com will then open a new position of the same value after the takeover.

Stock Splits and Consolidations

Companies may attempt to control their stock price to prevent it from getting too high or low. They can achieve this through two methods: stock splits and consolidations. In a stock split, the company gives additional shares to all existing shareholders, which 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 to increase their price. A reverse split may indicate that a company is struggling and fears being delisted.

In a stock split, FOREX.com closes the position, then reopens it to reflect the terms of the split. In a consolidation, traders will receive a cash dividend for any shares they lose.

Conclusion

Corporate actions can have a significant impact on shares, and traders need to stay informed to make informed decisions. Dividends, rights issues, mergers and acquisitions, and stock splits are some of the most common corporate actions that traders encounter. FOREX.com considers these corporate actions when opening and closing positions