What going ex-dividend means
Going ex-dividend means the right to receive a dividend falls away. A company decides which shareholders get the dividend from its register on a particular date, and securing that right means holding the shares by a set deadline. The day shares start trading without the right to the dividend, after that deadline, is called the ex-dividend date.
On the ex-dividend date the share price usually starts lower by roughly the amount of the dividend. This adjustment of the share price by the size of the dividend is what the ex-dividend drop refers to.
Why the share price drops
A dividend hands part of the money a company has built up to its shareholders. When the dividend is paid, that much cash leaves the company, so the value of the company falls by the same amount. The price adjustment on the ex-dividend date reflects that outgoing amount in advance.
So the drop on the ex-dividend date comes not from something bad happening to the company but from the dividend right separating from the share price. Shareholders who hold the right will soon receive the dividend, so the drop in price and the dividend offset each other.
Record date, ex-dividend date and payment date
Three dates are tied up in a dividend. The record date is the date of the register that fixes which shareholders receive the dividend, the ex-dividend date is the day trading starts without that right, and the payment date is the day the dividend actually lands in the account.
Because it takes a few days for a trade to settle and be recorded as actual ownership, the ex-dividend date comes before the record date. Receiving the dividend requires holding the shares before the ex-dividend date; shares acquired on the ex-dividend date itself do not receive this dividend.
Not mistaking the ex-dividend drop for a loss
If the share price in an account is lower on the ex-dividend date, it can look like a loss, but the drop is matched by the dividend about to be received. Going ex-dividend moves money from the share price into the dividend; it does not shrink what the shareholder owns.
That said, the price does not always drop by exactly the dividend after the ex-dividend date. Depending on that day's supply and demand and market conditions, it can drop more or less, and there is plenty of talk about how quickly prices recover from the ex-dividend drop. The ex-dividend concept explains why the price fell on that day; it says nothing about future prices. Jupick provides dividend figures for reference and does not suggest trading in any stock. This content is for information only and is not investment advice.
Frequently asked questions
- What does going ex-dividend mean?
- It means the right to receive a dividend falls away. On the ex-dividend date, when trading starts without that right, the share price usually starts lower by roughly the amount of the dividend. When the dividend is paid, that much cash leaves the company and its value falls, so the price reflects the amount in advance.
- Is a price drop on the ex-dividend date a loss?
- No. The drop on the ex-dividend date is matched by the dividend about to be received, so money has only moved from the share price into the dividend. In practice, though, the price can drop more or less than the dividend depending on that day's supply and demand and market conditions, so the ex-dividend drop is not exactly equal to the dividend.
- By when do shares have to be held to receive the coming dividend?
- The shares have to be held before the ex-dividend date to receive this dividend. Because it takes a few days for a trade to be recorded as actual ownership, the ex-dividend date comes before the record date, and shares acquired on the ex-dividend date itself do not receive this dividend.