The change a broker makes to an open share CFD position when the underlying company splits its stock, issues rights, consolidates or is taken over, to keep the economic exposure unchanged.
Because a CFD references a share it did not buy, corporate events have to be replicated by adjustment rather than by the event itself. A two-for-one split doubles the number of contracts and halves the reference price. A consolidation does the reverse. Rights issues and special dividends are handled by cash adjustment or by adjusting the opening level.
Takeovers and delistings are the awkward cases. Brokers generally close positions at a final price once the underlying stops trading, sometimes at short notice, and they usually raise margin or prohibit new positions once a bid is announced.
Stops and limits attached to the position are adjusted too, but not always in the way a trader expects, so any resting order should be checked after an event rather than assumed correct.
Example: long 500 CFDs at $80 and the company splits three for one. The position becomes 1,500 CFDs at a reference of $26.67. Exposure stays at $40,000 and a stop at $76 should be restated near $25.33.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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