Definition of Ex-Dividend
Ex-dividend is a term used in the stock market to indicate that a stock is trading without the value of its next dividend payment. When a stock goes ex-dividend, the next dividend payment is not included in the share price, and the seller remains entitled to receive that dividend instead of the buyer.
The ex-dividend date is critical for investors because purchasing the stock on or after this date will not entitle them to the upcoming dividend. Instead, they would need to have purchased the stock before the ex-dividend date to receive the dividend.
Examples
Example 1: Ex-Dividend Impact on Share Price
Suppose Company XYZ announces a dividend of $1 per share. If the stock is trading at $50 before going ex-dividend, on the ex-dividend date, the stock price is expected to drop to $49 to reflect the removal of the dividend value.
Example 2: Ex-All Scenario
An investor purchases shares of Company DEF after the declaration of several benefits such as dividends, rights, and bonuses. If the shares go ex-all, the purchaser will not be entitled to any of the ongoing benefits, as they all belong to the seller.
Example 3: Cum-Dividend Purchase
If an investor buys shares cum-dividend, they will receive the most recent dividend declared by the company, as the transaction occurs before the ex-dividend date.
Frequently Asked Questions (FAQs)
Q: What does ex-dividend mean?
A: Ex-dividend means that buyers of the stock on or after the ex-dividend date are not entitled to receive the upcoming dividend payment; it remains with the seller.
Q: How does the ex-dividend date affect share price?
A: The share price typically drops by approximately the amount of the dividend on the ex-dividend date to reflect the value of the dividend being paid out.
Q: What does “cum-dividend” mean?
A: Cum-dividend indicates that the buyer of the stock will receive the next dividend payment, as the stock is purchased before the ex-dividend date.
Q: What is an ex-rights date?
A: The ex-rights date means the stock is trading without the value of the rights offering, and thus, the rights to purchase additional shares do not transfer to the buyer.
Q: Can I buy a stock on the ex-dividend date and still get the dividend?
A: No, you need to purchase the stock before the ex-dividend date to be entitled to the dividend.
Q: What does “ex-all” mean?
A: “Ex-all” means that all benefits, such as dividends, rights, scrip issues, and bonuses, belong to the seller rather than the buyer.
Q: Why do companies declare ex-dividend dates?
A: Companies declare ex-dividend dates to establish a cutoff for entitlement to the next dividend payment and other benefits, clarifying which shareholders are eligible.
Q: How is the ex-dividend date determined?
A: The ex-dividend date is usually set by the exchange or regulatory body, typically occurring one business day before the record date.
Q: Do all stocks have an ex-dividend date?
A: Only stocks that pay dividends will have an ex-dividend date as part of their dividend distribution process.
Q: Is the drop in share price on the ex-dividend date always equal to the dividend amount?
A: The drop in share price often reflects the dividend amount, but actual changes can be influenced by market forces and investor behavior.
Related Terms
Cum-Dividend
Cum-dividend refers to a stock trading term indicating that the buyer is entitled to the next dividend payment when purchasing shares before the ex-dividend date.
Ex-Rights
Ex-rights means the stock is trading without the value of rights to purchase additional shares, which remain with the seller instead of the buyer.
Ex-Coupon
Ex-coupon is used for bonds or similar securities and indicates that the next coupon payment (interest) will belong to the seller instead of the buyer.
Ex-Capitalization (Ex-Cap)
Ex-capitalization refers to the removal of the entitlement to capitalization rights from a stock, meaning any benefits due to such changes stay with the seller.
Ex-Bonus
Ex-bonus indicates that any bonus shares or entitlements to receive bonus shares belong to the seller, not the purchaser, on a specific share purchase.
Online References
- Investopedia: Ex-Dividend
- Dividend.com: Understanding the Ex-Dividend Date
- Fidelity: Dividend Dates
- Morningstar: Basics of Dividends
- Nasdaq: What is Ex-Dividend?
Suggested Books for Further Studies
- “Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market” by Kelley Wright
- “The Ultimate Dividend Playbook: Income, Insight, and Independence for Today’s Investor” by Josh Peters
- “Get Rich with Dividends: A Proven System for Earning Double-Digit Returns” by Marc Lichtenfeld
- “Dividends: A Primer” by Tom Lydon
- “The Dividend Growth Investment Strategy: How to Keep Your Retirement Income Doubling Every Five Years” by Roxann Klugman
Accounting Basics: “Ex-Dividend” Fundamentals Quiz
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