Stock investors can earn money from the price appreciation of stock shares and also from dividends paid by stock. Stocks that pay regular dividends typically make a payout to shareholders four times a year. To earn a paid dividend, an investor must own the stock by a specific date set by the corporation's board of directors.
When a corporation's board of directors announces an upcoming dividend payment on the company's stock, the announcement includes the amount of the dividend and two dates. The record date is the date on which all shareholders are recorded, and investors owning stock on that date are entitled to receive the dividend. The payment date is the date the dividend is credited to the investors' accounts or a check is sent out. The payment date is typically a few days to several weeks after the record date.
A stock trade takes three business days to settle, or become official. This means that to own a stock on a specific date, an investor must buy the shares those three days before the target date. If the goal is to earn a dividend, the stock must be owned on the record date, so the stock must be purchased three days before that date. Investors who buy the stock two days before the record date will not receive the announced dividend. So the stock goes ex-dividend two business days before the stock's dividend record date.
Stock Price Decrease
On the ex-dividend date, the share price of the dividend-paying stock decline by the amount of the dividend. For example, if the stock price closed the previous day at $50 and the dividend to be paid is $1, the shares will open trading at $49 on the ex-dividend date. This value change prevents traders from buying shares the day before the ex-dividend date to become shareholders of record and selling the next day, collecting the dividend by owning the stock for only one day.
Value to Shareholders
Shareholders who own the shares before the ex-dividend date do not have their investment value change on the ex-dividend date. The $50 value per share becomes a $49 share value plus the right to receive the $1 dividend. At some point in the future, the stock value will recover to the $50 level if other factors affecting the share price have not changed.
Stock market websites often do not report that a stock has gone ex-dividend. The share price automatically starts trading at the new, lower price. Stock quotes often report the amount of price change from the previous day, and on the ex-dividend date the amount of change due to the dividend is not included. Using the $50 stock and $1 dividend example, if the stock is trading at $49.10 on the ex-dividend date, the quoting services will indicate that the stock is up 10 cents.
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.