Every investor enters the stock market with different goals. One may be a salaried person with a goal of multiplying a portion of the savings; one may be a person who just wants to invest for the long term and use the investments as a retirement fund; the rest are professional investors who rely on the stock market income to make a living.
The idea here is to invest in stocks of those companies that have a high demand for their products, stable business and most of all, offer regular dividends to their shareholders. Furthermore, they invest in numerous companies that offer dividends to create a regular source of income while creating a future fund based on the price appreciation of the stocks.
However, a lot goes on when a company decides to offer dividends. For example, if you decide to sell the whole or a portion of your holdings at some point, you won’t receive the same dividend as you were before. There are some investors who invest in a company just before the company is about to announce a dividend and then sell the shares as soon as they get the dividend amount. This makes up for a quick profit-making opportunity. However, for all the investors who are investing to earn dividends, this blog will help you understand the jargon, and one of the most important among them is the ex-dividend date.
What are dividends?
When you buy the shares of a company, you become the shareholder and the owner based on the number of shares you hold. As a shareholder, you are entitled to a portion of the profits of the company if the company decides to distribute them to the shareholders. The dividend is that distribution of the company’s profits to the common shareholders. Cash dividends are the most common type of dividend where you receive the amount directly into your trading account. The amount is entirely based on the number of shares you hold.
The ex-dividend date
The ex-dividend date determines which shareholders will receive the announced dividend of the company on that specific date. It is the day when the stock of the company goes ex-dividend, meaning the stock from that day does not carry the value associated with its next dividend payment.
The ex-dividend date is generally set two business days before the record date record date. It is a general rule that you must hold the stocks of the company before the ex-dividend date to be eligible for receiving the dividend amount.
Understanding the ex-dividend date To understand the ex-dividend date, you must understand the four cycles of dividend announcement. Two are before the ex-dividend date, and one follows to offer shareholders dividends.
- Declaration Date: The declaration date is when the company announces it will be issuing a dividend in the coming months. Generally, the share price rises after such an announcement.
- Record Date: The date is associated with the company determining who are the company’s shareholders and who are eligible to receive the dividend.
- Ex-dividend date: The ex-dividend date is the date on which the company finalises the shareholders that will receive the dividend.
- Payable date: Also known as payment date, it is when the shareholders receive their dividend amount.
The ex-dividend date is set two days before the record date, and only those shareholders who have holdings of the company stock at least one full business day before the announced record date are entitled to receive the dividend amount. Usually, on the ex-dividend date, the price of the stock declines by the amount of the dividend. Therefore, it is true that the stock price loses the value of the future dividend payment. It happens because the company is left with fewer profits after announcing a dividend, which reflects in the company’s accounting books. Based on the expenses, the stock price declines with the dividend value.
Difference between the ex-dividend date and record date
As explained above, the ex-dividend date is the date on which the cutoff point for a pending stock dividend happens. If you have bought a stock one day before the ex-dividend date, you will be eligible to get the dividend amount. However, if you buy the stock on the ex-dividend date or after the ex-dividend date, you won’t be eligible to receive the dividend. Furthermore, if you want to receive the dividend and still sell the shares, you can only sell the stocks after the ex-dividend date.
On the other hand, the record date is the date on which the company identifies and makes a list of all the current shareholders. On this day, it determines the individuals who are eligible to receive the dividend amount. If you are not holding the shares on this date, you will not receive the announced dividends. As SEBI follows a T+2 settlement process, you need to buy the shares of a company at least three days before the record date or two days before the ex-dividend date.
Buying shares: Before the ex-dividend date or after the ex-dividend date?
Suppose a company has announced that it will be paying dividends in the coming months. Your aim is to make profits based on the offered dividend amount. However, you realise that you missed the ex-dividend date and can no longer be eligible for the dividend amount. What can you do now?
If you have missed the ex-dividend date, there is not much that you have missed regarding the short term profit. It is because the shares of a company decline by the value of the dividend offered by the company. For example, if the company’s share price was Rs 500, and it announced a Rs 30 dividend per share, its share price will decline by Rs 30 after the ex-dividend date. Now, you can realise the same profit as you would have with the dividend amount.
Importance of ex-dividend date
As the stock loses its dividend value after the ex-dividend date, the days before the date are very important for the company and its investors. Before the day, the stocks carry the value of the dividend, meaning that it has the potential to offer profits to anyone who buys the shares in the coming days before the ex-dividend date.
Due to this benefit, the stock prices increase based on the rupee value of the announced dividend. If the stock price crosses the dividend value, it makes up for a profit-making good opportunity for current investors. Hence, the ex-dividend date offers the dual benefit of temporary capital appreciation and the promise to receive the dividend on the payable date.
Final word
The ex-dividend date is a vital factor for investors who want to manage and adjust their holdings. Furthermore, the ex-dividend date also allows investors who want to make quick profits to identify the right time to buy the shares of the company that has announced a dividend payout.
Once you know the ex-dividend date, you make an investment strategy, buy shares of such companies, and sell them after you have received the dividend account. However, this transaction needs a Demat and trading account. You can open a free Demat and trading account by visiting the IIFL website or downloading the IIFL Markets app from the app store to begin your trading journey.
