The ex-dividend date represents the stock trading day that new investors cannot receive the upcoming dividend. The exchanges generally set that date two days ahead of the registration date to give dividend-paying companies the opportunity to add all appropriate names to their books. Some speculators attempt to capture the dividend by buying the stock a day ahead of the ex-dividend date, then selling it on the date itself, which can be done in premarket trading before the exchanges officially open.
Ex-Dividend Price Effects
On a quiet trading day the stock price of a dividend-paying corporation would typically trade at a lower price on the ex-dividend date. Thus a trader who wishes to capture the dividend could sell his stock in premarket trading on the ex-dividend date, but would expect to receive a lower price for his shares by the amount of the dividend.
Stock traders often attempt to get in ahead of those who regularly engage in dividend-capture tactics by buying days or weeks ahead of the date that companies declare their regular dividends. As the ex-dividend date becomes closer, more buyers time their purchases to receive the dividend, thus creating additional demand and driving up the stock price. Those who buy simply to capture the dividend can then sell in either the premarket or during regular trading on the ex-dividend date.
National and world news, political events and economic reports can cause wide daily swings in the market averages. Given the relatively thin trading in premarket activity, such factors tend to be magnified and can result in exaggerated price moves that overwhelm the slight dividend price adjustments that typically occur on the ex-dividend date. This makes attempting to time a trade for the purpose of capturing a dividend particularly risky.
Those who buy stocks to capture the dividends must also be aware that the declaration date is when a company announces the day of its upcoming dividend. The dates typically fall on a regular quarterly basis and in steady amounts. The declaration date can also cause significant price swings in the stock if a hefty increase or cut is announced. Whether for gains or losses, traders can sell at any time, whether premarket, during regular hours or in after-market trading sessions.
Robert Rimm graduated from the University of Pennsylvania and founded 88keys.com to provide education, writing and communications services for clients within the nonprofit, arts and education communities in the United States, Europe and Russia. His key interests include art and culture, social entrepreneurship, education, the environment and human rights. He is fluent in French and Russian, and is a widely published author.