Ex-dividend determines which shareholders are eligible for a dividend distribution from a publicly traded company. The ex-dividend date is the day a stock begins trading without dividends, and shareholders must purchase the security at least three days before the record date to receive a payment. Dividends can be paid in cash, stock, or other forms.
An ex dividend determines which shareholders will receive a dividend distribution from a publicly traded company. Since many stocks change hands or trade quite frequently, a company that pays dividends needs to set a cut-off date that determines which shareholders are eligible for the payment. Dividends represent part of an investor’s overall return on a stock, and therefore an ex-dividend becomes increasingly valuable to the individual or institution holding a security when it is distributed.
Companies pay dividends from current earnings or earnings in progress. These payments are benefits and not required by any publicly traded entity. Before a distribution can be made, a company’s board of directors must approve the payment.
Dividends are paid in cash or stock, although most distributions are made primarily in cash. If a company doesn’t have the cash reserves to make cash distributions, but still wants to reward shareholders, it could make those distributions by giving investors additional shares of capital. Sometimes, if cash or stock is not an option, a company may make a distribution to shareholders in the form of a product or service it provides.
Investors can trade shares at will, as long as there is a buyer and a seller involved in each transaction. In order to keep track of investors who own shares in a company, management maintains a list containing record holders with information on all shareholders. It takes up to three days for a change of ownership to be registered in shares after an original purchase or sale transaction has been made. As a result, confusion could easily arise as to who is eligible to receive a company’s stock or cash dividend payment.
This is where the ex-dividend comes into play, and there are several events surrounding the milestone. A company’s ex-dividend is declared on a certain date on the ex-dividend calendar. This date determines when a dividend-paying stock begins trading without dividends, for all intents and purposes. It means that if shareholders buy a share on or after the ex-dividend date, they are not eligible for the most recent dividend distribution. Additionally, if an investor sells a stock on or after the ex-dividend date, it is no longer eligible for the most recent dividend payment.
The day a company discloses its intentions to make a dividend distribution to its shareholders is known as the declaration date. This is important because this is the date a shareholder would like to be on the company’s list of record holders. Otherwise, they will not receive a dividend. For a shareholder’s name to appear on that list, they must purchase the security at least three days before the record date, which is the day a company examines its record holder list to determine who is receiving a payment. The record date falls one day before the ex-dividend date.
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