Understanding the terms, ex-dividend and ex-dividend date: The declaration of dividend is an important strategic decision of the company, and is a part of the capital management. The investors who want regular income from the stocks, invest in the shares of the company that have high dividend yields. The investors should understand two important dates with respect to dividend, which is the “record date” or “date of record” and the “ex-dividend date” or “ex-date”. The companies that declare dividends, set a record date (date when the investor must be on the books of the company as a shareholder) for dividends. According to this record date, stock exchanges determine an ex-dividend date, which is usually two trading days before the record date. If a stock is purchased on or after this ex-dividend date, then the entitlement to the dividend payment under discussion is swept away. Therefore, if the investor buys a stock before the ex-dividend date, then only he becomes eligible for receiving the upcoming dividend payment.
It is to be noted that with large amount of dividend, the stock price might witness a significant movement as the ex-dividend date approaches. After this it might fall by the same amount post the ex-dividend date. The investor should know that if the stock is purchased prior to the ex-dividend date, he can still sell the stock any time on or after the ex-dividend date and can be eligible to receive the dividend. This is generally a misconception that investors need to keep on holding the stock till the record date or pay date, although it looks to be a safer strategy. The ex-dividend date is generally reported along with dividend declarations in all the major financial publications of the country as well as the information is easily available to the investors on the stock exchange websites. The company also provides this information to the shareholders. The information is also easily available from the investments broker. The company’s investor relations department can also be contacted for this purpose.
Effect of Ex-Dividend Date: The declaration of a dividend becomes an attraction for the investors for investment and returns point of view. Thus, investors look for buying the stock before the ex-dividend date and can do so at a premium, in order to reap dividend related benefits. The stock price thus tends to move up before the ex-dividend date but market conditions also many a times govern the scenario. On the ex-dividend date, the stock price may go down by an amount relating to the dividend declared as new investors are ineligible to receive dividends and are reluctant to pay a premium; but sometimes, the market may still be positive or bullish about the stock. The companies that pay smaller dividends may not witness a steep movement while normal trading itself may bring some fluctuations. Many people invest in certain stocks solely to collect the dividend payments. Further, some investors purchase stocks just before the ex-dividend date and then sell them again right after the date of record, which can result in a small profit if it is done appropriately.
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