Updated July 11, 2023
Introduction of Ex-Dividend Date
The ex-dividend date (Ex.dd) is a date that involves the payment of dividends on stocks, which are held publicly and privately. It is also known as the ex-date or reinvestment date. The (Ex.dd) represents the date post which the security is traded without a previously declared dividend.
Explanation
Most firms listed on the stock exchange provide a dividend feature to their security. As these securities are traded in markets, buyers and sellers cannot buy and sell the security. The higher the liquidity for security, the higher will be buying and selling of shares. Due to high liquidity and as security owners keep changing due to buy-sell transactions, it happens that at the end of each trading, the security has different shareowners.
When a firm declares a dividend to be paid to its shareholders, it assigns a record date. As per the record date, the firm will distribute the dividend amount only to the investors who own the share(s) at the end of the trading day on the record date. The firm thus distributes the dividend amount to all the shareowners registered as of the record date. However, stock exchanges set a date before the record date (usually a business day before the (Ex.dd) to avoid the delays that are caused due to the settlement process). Such a date is referred to as an ex-dividend date or ex-date.
Hence, the (Ex.dd) is considered the key date for a stock purchase, as if the stock is purchased on or after the (Ex.dd), the investor will be considered as an ex or will not be entitled to the payment of dividends.
Example of Ex-Dividend date
Let’s take an example to understand the (Ex.dd) better:
- On April ’01, 2019, ABC Inc declared a dividend to be paid to shareholders on record on June ’20, 2019. This is considered a declaration date, as payment of a dividend has been announced on this date.
- ABC Inc also announces that only shareholders available on the company books on/before May ’20, 2019, are entitled to the dividend. This date is considered a record date.
- The stock (Ex.dd) will be one business day before the record date, May ’19 2019.
- On (Ex.dd), share prices typically drop, as per the paid dividend.
| Declaration Date | Ex-Dividend Date | Record Date | Payable Date |
| 01-04-2019 | 19-05-2019 | 20-05-2019 | 20-06-2019 |
Impact of Ex-Dividend Date
- If an investor purchases a stock before the (Ex.dd), he will be entitled to receive the upcoming dividend payment. If he purchases the stock on or after the ex-dividend date, he won’t receive the upcoming dividend payment.
- As the (Ex.dd) approaches, the share price may go up by the dollar amount of the dividend to be paid, then will fall by that amount after the ex-dividend date. On ex-dividend day, a stock that has ” one ex-dividend” “is typically marked with an” in publications.
- The share price of stock typically drops on the (Ex.dd).
Importance of Ex-Dividend Date
- If an investor purchases a stock before the (Ex.dd), he will be entitled to receive the upcoming dividend payment. If he purchases the stock on or after the (Ex.dd), he won’t receive the upcoming dividend payment.
- Between the closing of the trading session for the day before the ex-dividend and the opening of the market on the ex-dividend date, prices for all existing orders get decreased by the amount of cash dividend paid. The cash dividend amount does not reduce from only ‘do not reduce’ orders. This happens because the firm distributes the cash dividend directly from its reserves to the shareholders, reducing its overall value.
- As the market opens on the (Ex.dd), the stock share price gets adjusted with the dividend paid to the shareholders. As a result, the security opens at a lower price than the previous day closing on the ex-dividend date.
Ex-Dividend Date vs Record Date
When a firm declares a dividend to be paid to its shareholders, it assigns a record date. As per the record date, the firm will distribute the dividend amount only to the investors who own the share(s) at the end of the trading day on the record date.
The firm thus distributes the dividend amount to all the shareowners registered as of the record date. However, stock exchanges set a date before the record date (usually a business day before the (Ex.dd) to avoid the delays that are caused due to the settlement process). Such a date is referred to as an ex-dividend date or ex-date.
Hence, the (Ex.dd) is considered the key date for a stock purchase, as if the stock is purchased on or after the ex-dividend date, the investor will be regarded as an ex or will not be entitled to the payment of dividends.
Benefits of Ex-Dividend Date
- Stock price typically increases while approaching the (Ex.dd) and decreases on the ex-dividend date. A trader can take the appropriate position in the market or take advantage of this opportunity.
- If the investor purchases the stock a day before the (Ex.dd) and sells the stock on the ex-dividend date or after, the investor will be entitled to receive the dividend payment. Hence, an investor must hold the stock for only one day to receive the dividend payment.
Conclusion
The ex-dividend date is defined as a date that involves the payment of dividends on stocks that are held both publicly and privately. It is also known as the ex-date or reinvestment date. The (Ex.dd) represents the date post which the security is traded without a previously declared dividend.
The ex-dividend date is considered the key date for a stock purchase as if the stock is purchased on or after the (Ex.dd), it will be ex or will not be entitled to the dividend payment.
Recommended Articles
This is a guide to the Ex-Dividend Date. Here we also discuss the introduction and impact of the ex-dividend date, benefits, and importance. You may also have a look at the following articles to learn more –
