What is an ‘Ex-Dividend’
Ex-dividend is a stock trading term that specifies when a declared dividend is owned by the seller rather than the buyer. The term literally means “without the dividend” because once a share trades ex-dividend, the buyer no longer has the right to receive the most recently declared dividend.
BREAKING DOWN ‘Ex-Dividend’
A stock trades ex-dividend on or after the ex-dividend date (ex-date). If a trader purchases a stock on its ex-dividend date or after, he or she will not receive the next dividend payment. After the ex-date has been declared, the stock will usually drop in price by the amount of the expected dividend.
When a company decides to declare a dividend, its board of directors establishes a record date. This is the date when a person must be on the company’s record as a shareholder to receive the dividend payment. Once the record date is set, the ex-dividend date is set according to the rules of the stock exchange on which the stock is traded. The ex-dividend date is typically set for two business days prior to the record date. If a company issues a dividend in stock instead of cash, the ex-dividend date rules are slightly different. With a stock dividend, the ex-dividend date is set on the first business day after the stock dividend is paid out.
Stock A , for example, announced in a press release dated March 7, 2018, that its stock would begin trading ex-dividend on March 8. Meanwhile, the record date was set as March 9. The firm had previously declared a dividend payment of 10 Rs per share scheduled for April 2, so shareholders who purchased Stock A prior to the ex-date of March 8 and were still holding as of March 9 were eligible for the cash payment.
Why the Ex-Dividend Date Is Important?
Investors need to buy the dividend-paying stock at least two days before the record date, since trades take two days to settle. Since the ex-dividend date is usually set two business days prior to the record date, investors need to own the stock one day before the ex-dividend date to receive the dividend.
Stock Price Movement on the Ex-Dividend Date
While the stock price typically drops by the amount of the dividend on the ex-dividend date, there is no guarantee that this will happen. Traders usually price any dividend distribution into the stock price during the normal course of business to reflect the company’s decreased total assets. This makes it very difficult for individuals to profit by buying before the ex-dividend date and quickly selling thereafter.
Other Important Dividend-Related Dates
There are two other important dates related to dividend payments.
The declaration date, also known as the announcement date, is the date when a company’s board of directors announces a dividend distribution. This is the least important date, as it does not affect who receives the dividend in the way that the ex-dividend date does.
The payment date is the date when dividend checks are mailed out or credited to investor accounts.