Corporate actions

How corporate actions can impact share CFDs

Corporate actions are events carried out by a publicly-traded company that impact its shareholders. Here’s an overview of how corporate actions can have an impact on your share CFD trades.

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Dividends

Dividends describe a company’s payment to shareholders on a per-share basis to all holders. A dividend is usually a portion of a company's profits, which it chooses to pay out to shareholders rather than reinvest in the firm.

The declaration date

On the declaration date, a company’s board of directors announces the intention to pay a dividend on a specified future date.

The ex-dividend date

On this date, shares already bought and sold lose the right to be paid the most recently declared dividend. Subsequently, the value of the stock falls by the value of the dividend amount, as holders of the company's shares are no longer entitled to the dividend.

If you’re holding a long CFD position in the stock on the day of the ex-dividend date, you would see a drop in your position’s value. OANDA will credit your account by the dividend amount multiplied by the number of CFDs you hold.

If you’re holding a short CFD position in the stock on the day of the ex-dividend date, your position will increase in value, and OANDA will debit your account by the amount of the dividend.

You will not gain or lose anything by holding a CFD position in a stock that pays a dividend. However, you may still be liable for any tax or tax equivalent charges.

Stock dividends

Stock dividends are similar to cash dividends, except the dividend is paid out as additional shares instead of cash. When holding a CFD position in a stock issuing a stock dividend at OANDA, your position will be cash adjusted in the same way.

Bonus issues

A bonus issue is where a company issues additional free shares to existing shareholders. It is similar to a stock dividend, but the funding for the bonus issue comes from a company’s retained earnings or capital instead of income.

Stock splits

If a stock’s price gets too high, some investors might become priced out of purchasing a stock. As a result, companies sometimes issue a “stock split” to reduce the stock price.

A stock split increases the number of shares in a company and reduces the company's share price but does not affect the company's market capitalization or dilute the value of shares because existing shareholders are automatically issued shares at a ratio, for example, 2 for 1.

The opposite of a stock split is called a “reverse stock split”, which typically occurs when a company's share price has dropped so much that it might deter investors from purchasing shares. For example, there is a stigma associated with “penny stocks”- or stocks that trade below $1 a share.

A reverse stock split consolidates the number of shares by a ratio. So a holder of 100 shares would see their position reduced to 100:1 if that’s the stock split ratio applied. If a holder holds a position of fewer than 100 shares, a cash adjustment takes place to compensate for the loss.

Rights issue

A rights issue is where a company offers its existing shareholders the chance to purchase newly issued shares, typically at a discounted price. Companies use this as a way of raising additional capital. At OANDA, we will sell the rights issue shares automatically and provide a cash adjustment to your account for the value of the rights issue.

Mergers and acquisitions

A merger or acquisition is where one company agrees to purchase the other, or agrees to merge with another. In these cases, we will close out any relevant positions at the resulting entitlement’s price and cash-settle to the equivalent price.

Spin-offs

A spin-off is where a parent company distributes shares of a subsidiary to the shareholders of the parent such that this subsidiary becomes an independent company. At OANDA, we will sell the spin-off shares automatically and provide a cash adjustment to your account for the value of spin-off shares.

Withholding taxes & dividend taxes

Dividends on some share CFDs may be subject to taxes, depending on the jurisdiction where the stock is listed. Tax treatment of dividends can differ depending on your location if tax treaties are in place.

Share CFDs on some other listed companies are not subject to taxes. However, given that our liquidity providers hold an equivalent position in the underlying shares as a hedge, they receive the actual dividend, which is subject to tax, if applicable to them. We then pass on the economic value of this net dividend to you. In these products, the difference between the gross and the net dividend value is referred to as ‘tax equivalent’.

What is share trading?

Companies raise money by issuing shares. Initial stock offering (IPO) is how companies get listed on the stock exchange. A company uses the capital it raises through an IPO to generate income. Once it starts trading, the issuing company no longer receives money from trades. Out in the open market, the stock price fluctuates as its perceived value changes over time.

Generally, the price of stocks has gone up over the years. But there have been many extended periods of stagnation when the overall trajectory of the markets is more or less sideways. We’ve also had bear markets when the average price of the stock market trades lower over time.

With the advent of the pandemic and the injection of unprecedented amounts of government money into the global economy, stocks surged through 2020 - 2021. As fear of yet another deadly variant eased during the early months of 2022, the Federal Reserve and other central banks began to warn they would be looking to turn off quantitative easing and raise interest rates to combat growing inflation. The resulting dramatic increase in volatility has made it difficult for investors to know which stocks to invest in, even short term.

Traditionally, companies in sectors that do well out of a higher inflationary environment are to be found in the energy and financial sectors. Commodities also do well. The most successful traders and investors take care to diversify their portfolio and keep back enough cash to be able to move with agility when opportunities or unwelcome surprises come their way.

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