An investor can certainly buy a stock on an ex-dividend day. In order to be eligible for the most recent dividend distribution, however, whether the payout is in cash or stock, an investor must purchase shares prior to the ex-dividend date. In the U.S., the regular trading session ends at 4 p.m. Eastern Standard Time, which is the time by which investors must own a stock on the day before an ex-dividend date to be eligible for the distribution.
Stocks exchange hands frequently in the financial markets and it takes a couple of days for transactions to clear. Companies adhere to a quarterly, annual or semi-annual schedule for paying dividends. The decision to issue dividends is based largely on the types of profits generated over a set period. Investors must buy a stock prior to the ex-dividend day in order to qualify for the distribution. Otherwise, if an investor buys a stock on the actual ex-dividend date or later, the dividend payout belongs to the investor selling the security.
Several days are designated in the dividend process to support a company's ability to make payments fairly and in an organized fashion. A declaration day is when company announces its intentions to make dividend distributions. The business also sets a record date, which is entered in a company's records to determine who is eligible for a payout. A stock exchange declares an ex-dividend date, which usually falls two-days prior to the record date, according to the U.S. Securities and Exchange Commission. The payment date is when dividends are actually distributed.
A dividend can be canceled even after the payment date has been announced. In June 2010, oil producer BP canceled a dividend payment that was scheduled for June 21 of that year amid a horrific oil spill in the Gulf of Mexico, rendering the ex-dividend day useless. The company also suspended dividend payments for subsequent quarters. The distribution was canceled to protect the best interests of the corporation and its investors, according to a press release issued by BP.
Investors may purchase dividend-paying stocks prior to the ex-dividend date as a trading strategy. This technique is risky. An investor buys a stock prior to an ex-dividend day in order to obtain the dividend. The investor has no intentions of holding the stock, and attempts to sell the security after the ex-dividend day. Even if the stock price does not rise, an investor can still profit because of the dividend payouts. If the stock price drops after an ex-dividend date, however, an investor can lose money even after factoring in the dividend.
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