With a soon to be paid dividend, the record date is used to determine who receives the dividend and which investors purchased shares too late to earn the dividend. The rules of stock settlement make it possible to sell shares before the actual record date. However, the financial results may not be what you are expecting.
Record Date and Settlement
Every dividend announcement includes a record date as well as the dividend amount and payment date. An investor must be a shareholder of record on the record date to be entitled to receive the dividend. U.S. stock market rules allow a stock market trade three business days to settle, or become official. For an investor to be a shareholder of record on the record date, the shares must be purchased at least three business days before the record date to allow the settlement process to complete.
Selling After Ex-Dividend
The three day stock settlement means someone who buys shares two business days before the record date will not become a shareholder of record until the day after the record date. This investor will not receive the dividend. The day two days before the record date is called the ex-dividend date. So if you already own shares, it is possible to sell the shares on the ex-dividend day or the next day -- both before the record date -- and you will still be a shareholder of record on the record date.
No Free Lunch
It may seem like an easy way to make money. Buy shares three days before the record date to become a shareholder of record. Sell the next day when the shares go ex-dividend and receive the dividend from owning the shares for less than one business day. The market keeps this trade from being profitable by starting share trading on the ex-dividend date at the previous day's closing price minus the amount of the dividend. A trader who attempts the one-day trade to earn a dividend will break even at best.
Record Date Selling
While it is possible to sell a stock during the two days before the record date and still receive the dividend, the loss on the stock will probably equal or exceed the dividend amount. To make this strategy work, a trader must wait for the share price to move back above the value on the date before the shares went ex-dividend. The record date is also separate from the dividend payment date, which may be up to several weeks after the record date. All shareholders of record on the record date will receive a dividend on the payment date regardless of if and when the shares were sold.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.