A record date is when a company identifies shareholders to pay an upcoming dividend. The ex-dividend date is when the stock price drops by the dividend amount. Mutual funds and asset-backed securities also use record dates for distributions. Settlement periods are important for buyers to receive dividends.
A record date is the date a company identifies the shareholders to whom it will pay an upcoming dividend. The owners of the shares on the record date will receive the dividend. Once the date arrives, the stock price will generally drop by the amount of the dividend. This is known as “ex-dividend trading”. The reason a stock trades ex-dividend is because if the shares are sold after the record date, the seller, who was the shareholder on the record date, receives the dividend.
The ex-dividend date is the first day of the ex-dividend period. The ex-dividend period is the period of time from the record date until the date the dividend is actually paid. A stock trades ex-dividend for the entire ex-dividend period.
On August 1, a company could declare a dividend to be paid on September 1 to shareholders of record on August 15. In this case the record date is August 15th. All shareholders registered on August 15 will receive the dividend. The stock will be traded ex-dividend from August 16 to September 1.
With respect to mutual funds, the record date is used to determine each owner and the number of shares he owns on a given date, in order to pay distributions to shareholders. Mutual fund distributions are typically paid annually or semi-annually, although fund stocks will pay dividends at various times throughout the year. Shareholders registered on the record date will receive the distribution on the distribution date.
The record date of asset-backed securities is the date on which the owners are identified so that a scheduled payment can be distributed. Owners as of this date will receive payment on the payment date. Asset-backed securities are debt instruments backed by specific assets, such as credit or installment agreements. As bills are collected or installment payments are made, the payments are distributed to the title holders in accordance with the terms of the title.
Whenever securities are bought or sold, there is a settlement period before the transaction is posted. A municipal stock or bond transaction is settled three days after the sale. U.S. government bonds and mutual funds typically settle the day after the trade date. This is important to keep in mind, as the deal must be settled before the record date for the buyer to receive the dividend or distribution.
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