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Corporate actions & price adjustments

A corporate action is an event that brings about a material change to a stock, or an event that is initiated by a firm that has an impact on its shareholders. This article explains the different types of corporate actions and how they affect your spread bet and CFD positions on our platform, including stock splits, mergers and dividends.

What is a corporate action?

A corporate action is an event carried out by a publicly traded company that subsequently has an effect on its shareholders. Bankruptcy and liquidation are examples of extreme financial corporate actions, which usually have a negative impact on shareholders. Dividends, stock splits, acquisitions, mergers, stock buy backs and re-branding are all common examples of corporate actions.

Corporate actions are usually approved by the company's board of directors, although some require the response of the shareholders or they may be permitted to vote.

Types of corporate actions

Mandatory corporate actions

Mandatory corporate actions are initiated by the company's board of directors, which has an effect on all shareholders. Examples of mandatory corporate actions include stock dividends, spin-offs, mergers and stock splits. Shareholders have no control over this decision and do not need to take any action.

Mandatory with choice/options corporate action

This is a type of mandatory corporate action where shareholders can choose between several options. For example, if a company offers cash dividends or stock shares to a shareholder, they can then decide which they would prefer between the two options. One of these options will be defaulted if the shareholder does not submit their decision.

Voluntary corporate actions

A voluntary corporate action involves an event that a shareholder elects to participate in. A response from shareholders is required for the action to go ahead. An example of a voluntary corporate action is a tender offer, where shareholders can decide whether to participate or refuse. Shareholders that choose to tender their shares at a predetermined price will then receive a payout from the company.

Corporate action event types

Dividends

When a stock goes ex-dividend, the value of that stock effectively falls by the dividend amount. This means if you hold a spread betting position in a company and that company announces a dividend, your account will be credited or debited on the day the stock goes ex-dividend.

If you were long, you would have been disadvantaged by the drop in the market caused by the pay out of the dividend, so we would credit your account with the dividend amount, less any applicable dividend withholding taxes. If you were short, you would benefit from the drop in the price, so the equivalent amount would be deducted. So, overall, you don't lose or gain anything from the adjustment. There are no withholding taxes on short positions.

Spread betting dividend adjustment:

Let's say you hold a long spread betting position of £30/pt on Vodafone and Vodafone announces a 15p dividend. In this case, £450 would be credited to your spread betting account.

15 points x £30/pt = £450

(15p is equivalent to 15 points in spread betting)

CFD dividend adjustment:

Let's say you hold a long position of 3,000 Vodafone share CFDs and Vodafone announces a 15p dividend. In this case, £450 would be credited to your CFD account.

15p x 3,000 = £450

Note: If you held a short position going into the ex-dividend date then your spread betting or CFD account would be debited £450. The dividend will appear as a 'Price Adjustment' in your account history within the platform.

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How are dividends dealt with for indices?

When a stock goes ex-dividend, ignoring other market forces, the value of that stock effectively falls by the dividend amount. In most cases this will cause the index value to drop too, as the value of the index is based on the value of the stocks within it. The amount that the index drops is dependent on the weighting of the stock within the index.

Following on from the above example, a similar cash adjustment would also be applied to your account if you held a position in the UK 100 index, where Vodafone is a constituent. We would convert the 15p dividend into points to calculate the amount to be deducted or added in relation to the relevant index spread bet.

Note: There are no price adjustments on forward indices or on our Germany 40 and Norway 25 cash indices.

Withholding tax

Dividend adjustments on long positions are credited to your account, less any applicable withholding taxes. Withholding tax is a levy deducted from dividends in most underlying markets. The deduction varies depending on the underlying market, but it's often reduced to 15% where a treaty between the UK and the relevant market exists.

The withholding tax deduction doesn't apply to short positions.

Stock splits

Stock splits usually take place when the value of a company's stock is getting too high, so the company splits the stock into a larger number of less valuable shares. Companies often do this to make the price more accessible to a wider range of investors. The share price will fall by a predetermined percentage and holders will gain the same percentage of shares. This does not directly impact the value of the company.

A reverse stock split is another type of corporate action that combines the number of existing shares into fewer, more valuable shares. This also does not directly impact the value of a company, although it can signal that the company may be in bad health.

Spread betting stock split example

Let's say you hold £3/pt (300 units) in company Q at a price of 1,607p per share and company Q announces on X date, that it will be issuing a stock split of 5 for 1.

This means that, for every 1 share you hold, you will be issued 5. So now you will hold £15/pt (1,500 units) at the reduced price of 321.4p (1,607p / 5).

Note that the overall trade value remains the same:

£3/pt x 1,607p = 4,821p; £15/pt x 321.4p = 4,821p

On your daily statement, a stock split shows in ‘brought forward’ transactions (pre-split values) and ‘carried forward’ transactions (post-split values).

CFD stock split example

Let's say you hold 300 units in company Q at a price of 1,607p per share and company Q announces on X date, that it will be issuing a stock split of 5 for 1.

This means that, for every 1 share you hold, you will be issued 5. So now you will hold 1,500 units at the reduced price of 321.4p.

Note that the overall contract value remains the same:

300 units x 1,607p = 4,821p; 1,500 units x 321.4p = 4,821p

On your daily statement, a stock split shows in ‘brought forward’ transactions (pre-split values) and ‘carried forward’ transactions (post-split values).

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Rights issues

With a rights issue, a company will offer its shareholders a chance to buy newly issued shares, usually at a discounted price, before they are offered to the public.

In these circumstances, ALFATRADING-MARKETS' clients might get to choose between three courses of action relating to share spread bets. They may be able to:

Sell their rights
Take up their rights and trade the cheaper stock
Do nothing and let their rights expire

FAQ

What is the meaning of a corporate action?

A corporate action refers to an event that could bring a change to the security, whether equity or debt, which will have an impact on its shareholders. This is a major decision that needs approval from the directors of the company, as it can affect its share price.

What are the types of corporate actions?

Examples of corporate actions are dividend yields, stock splits, mergers and acquisitions, stock buybacks and rights issues. These are then divided into two main types: mandatory and voluntary, which are either initiated by the directors of the company or the shareholders themselves. Learn more about share trading.

Why are corporate actions important?

Corporate actions are important as they help to give an indication of a company’s financial health through cash flow and balance sheets, as well as predictions for its short-term future. It’s essential that the shareholders have an understanding of how corporate actions will have an effect on the company’s share price and upcoming performance. Discover how corporate actions affect company fundamentals.

Are corporate actions taxable?

Certain types of corporate actions are taxable for both gains and losses, and this tax will be based on the full value of the trade. Others are non-taxable, such as dividend adjustments on long positions, where withholding tax is present within the majority of underlying markets. Spread betting is tax-free in the UK, meaning that when you open an account on our spread betting platform, you will not be taxed on corporate actions. However, tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK. Read more about our account types.

How do corporate actions affect spread bets?

When opening a spread bet position, although you do not take ownership of the asset, you’re still entitled to experience the same privileges that are given to shareholders, including dividends and stock splits. Read more about what spread betting means.

Disclaimer: ALFATRADING-MARKETS is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by ALFATRADING-MARKETS or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.