The payment of a dividend by a company has a direct effect on the price of the company's stock. Shares of a particular stock trade every day, and the effect a dividend payment has on the stock price is in response to which investors are entitled to receive the dividend and which investors will miss out on receiving the distribution.
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When a company declares a dividend payment, the announcement includes the amount of the dividend, the record date and the payment date. The record date is the date by which an investor must own shares to be entitled to receive the dividend. If the purchase of the shares results in official ownership after the record date, no dividend will be received. The payment date is the date the dividend money will be sent by cheque or deposited into an investor's brokerage account. The payment date can be a few days to several weeks after the record date. It is not necessary to still own the shares on the payment date to receive the dividend.
The purchase or sale of shares takes three business days to become official or settle. The three-day settlement is the standard time frame for stock market investing. Because of this, an investor must buy shares at least three days before the dividend record date to be the shareholder of record on that date. Two business days before the record date, a stock is classified as "ex-dividend." An investor who buys the shares on the ex-dividend date will not receive the dividend.
On the ex-dividend date the share price of the stock will open trading at the previous day's closing price less the amount of the dividend. For example, if a 50 pence dividend has been declared, the share price will open 50 pence lower than the closing price the day before. The share price information will show this new, 50 cent lower price as unchanged from the day before. The share price is directly changed by the amount of the dividend on the ex-dividend date.
If a share price did not drop by the amount of the dividend on the ex-dividend date, a trader could buy the shares the day before it goes ex, sell the shares the next day for the same price and collect the dividend. For example, the day before a share goes ex-dividend with a 60 p distribution, the stock price is £16, and an investor buys shares. On the ex-date the stock opens at £15. The investor will be the share holder of record and will receive the 60 p dividend and now owns share worth £15 per share. The value of the investor's investment stays the same through the ex-dividend process.
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