what is a ex dividend date

What Really Happens To A Stock

Price On The Ex-Dividend Date?

It's commonly stated that the price of a stock is automatically adjusted down by the amount of the dividend on the ex-dividend date and while in practice it often looks as if that's what takes place, technically that's not really what happens. The only trade price that the exchange reduces by the exact amount of a dividend is the quote of the previous day's close. not any actual trade. But because the quote of the previous day's closing trade AND the bid and the ask of all outstanding orders are also reduced (unless placed with a Do Not Reduce restriction) by the exchange, plus the fact that the net asset value of the stock is now less (by the exact amount of the dividend), when trading begins on the ex-date the effect is usually a reduction in price approximating the size of the dividend, as traders are well aware of the reduction in

the stock's net asset value.

Such an informal (though generally effective) reduction in stock price on the ex-dividend date is, of course, much more noticeable if the dividend is larger than the normal trading range of the stock. For example, if a stock has a normal daily trading range of, say, twenty five cents and the dividend is a few cents, the effect of a few cents' adjustment of the stock price may not be noticeable. However, if the dividend is two dollars, the price adjustment will nearly always be very noticeable, as it's well beyond a twenty five cent normal daily trading range.

So, while the market is free to trade the stock at any price on the ex-date, even at the open, much more often than not it trades lower by about the amount of the dividend. The only way to be sure whether any specific stock will or won't do so on its ex-date is to wait and see what happens.


Category: Bank

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