How corporate events affect stocks

When trading stocks, it’s important to keep an eye on events related to specific companies. These events can directly impact the value of your open positions.

1. What are corporate events?

2. Dividends

3. Shareholder rights issues

4. Mergers and acquisitions

5. Stock splits and consolidations

What is a corporate event?

A corporate event is a situation initiated by a publicly traded company that impacts its stock. There are various types of corporate events, but traders tend to focus on those that can affect the stock price. Some events may cause the stock price to drop, while others may increase it, influencing decisions about opening positions.

Let’s look at the most common corporate events you might encounter when trading stocks, and how these events can affect your position if you're trading through CFDs.

Dividends 

One of the most common corporate events is dividends. Companies use dividends to reward their investors by sharing a portion of the business’s profits. Dividends typically cause a drop in stock prices. Why? Because the company just paid out a significant amount of cash, reducing its overall value.

Shareholder rights issues

Rights issues (sometimes called secondary offerings) occur when a company offers new shares to its existing shareholders—usually at a price lower than the current market price.

Similar to dividends, rights issues often lead to a drop in the company's stock price. The reason is that these issuances increase the total supply of shares on the market, which in turn decreases the value of each existing share.

Rights issues typically come with a deadline for decision-making. Before this date, you will need to decide whether to take up the offer and buy additional shares.

Issues with open offers and rights

Similar to rights issues, in open offers, existing investors have the opportunity to purchase more shares. However, unlike rights issues, these rights cannot be sold within the open offer.

Mergers and acquisitions

Mergers and acquisitions (M&A) are two ways in which two listed companies can combine into one entity. Completing these processes can take months or even years, and often they do not go through if the terms cannot be agreed upon. During this period, investors and traders can still buy and sell shares of both companies.

However, if the merger or acquisition is completed, one or both of the shares may cease to exist. What happens to shareholders depends on the specific terms of the merger or acquisition.

CFD and Takeovers

If you hold a CFD position in a company that is subject to a merger or acquisition, your trade will be closed according to the terms of the transaction. Once the takeover is completed, a new position will be opened at the same value.

For example, let's say you hold 1,000 CFDs in Company A, which is trading at $6.50.

Company A then makes an acquisition of Company B. The terms of the acquisition state that investors in Company A will be offered 0.613 shares of Company B for every share they hold in Company A.

In this case, you would receive 613 CFDs of Company B. The new CFD price will then be calculated to ensure the value of your trade remains the same, in this case, at $6,500.

Stock Splits and Consolidations

Sometimes companies aim to adjust the price of their shares to prevent them from becoming too high or too low. Two common methods to achieve this are stock splits and consolidations.

In a stock split, the company issues additional shares to all existing shareholders. For example, a 2:1 split means that the number of shares each investor owns will double. This action is intended to lower the share price because the supply of shares increases.

A consolidation or reverse stock split is the opposite. Existing shares are combined, which reduces the supply, with the aim of increasing their price. A reverse split can be a signal that the company is facing problems and is concerned about being delisted from the exchange.

CFD and stock splits

In the case of a stock split, your position on FOREX.com will be closed and then reopened to reflect the terms of the split. The goal is to ensure that the circumstances affecting the value of shares in the public market are accounted for.

In the case of a consolidation, you will receive a cash compensation for any shares you lose.