Buying or selling a stock around the dividend dates can be confusing. For each dividend payment there is an ex-dividend date, a record date and a payment date. To insure the receipt of a pending dividend from a stock you own, the ex-dividend date is the most important of the three to understand.
Record and Ex-Dividend
To receive a dividend payment, an investor must own the shares on the declared record date. A company will include the record date with each dividend announcement along with the amount of the dividend. To officially own stock shares on a specific date, the order to buy the shares must have been placed at least three business days earlier. Stock trades in the U.S. take three days to "settle" or become official. Due to the three day settlement rule, a stock goes ex-dividend two business days before the record date.
Owning On Ex-Dividend Date
If the stock shares are purchased no later than the day before the ex-dividend date and held until trading starts on the ex-dividend date, the investor will receive the dividend payment. The stock can be sold any time after the market opens on the ex-dividend day and the dividend will still be deposited in the investor's account on the dividend payment date.
On the ex-dividend date, the share price of the stock will start trading at the previous day closing price minus the amount of the dividend. For example, a stock closes at $50 per share three days before the record date of a $1.00 dividend payment. At the open on the ex-dividend day, the shares will start trading at $49. This price change prevents a trader from profitably buying shares just before a stock goes ex-dividend and then selling on the ex-dividend date with a plan to profit from the dividend received.
Selling shares on the ex-dividend date defeats the purpose of earning the dividend. The value of the stock drops on the ex-dividend date by the same amount as will be earned when the dividend is paid. To collect a dividend from a short term stock investment, the shares must be held until the share price recovers to at least the value on the day before the ex-dividend date.
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