The ex-dividend date, also known as the reinvestment date, is a finance or investment term related to the payment of dividends. It is defined by the IRS as "the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment."[1] The London Stock Exchange defines the term "ex" as "when a stock or dividend is issued by a company it is based upon an "on register" or "record date". However, to create a level playing field when shares are traded on the London Stock Exchange during this benefit period an "ex" date is set. Before this "ex" date if shares are sold the selling party will need to pass on the benefit or dividend to the buying party."[2]
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Many publicly traded companies pay dividends to their stockholders. The question of who should be paid dividends becomes complex, as these companies are continually being traded and the composition of their shareholders changes each day. To settle this question, companies designate a date, known as the record date. Dividends are paid to the list of shareholders who hold stock on the record date. The process is further complicated by the fact that it takes time for a stock purchase to "clear" or "settle." To allow time for this processing, stock exchanges set a date — generally two business days prior to the record date — known as the ex-dividend date. Someone who purchases the stock on or after the ex-dividend date will not receive the dividend, as the purchase will not "settle" by the record date, and therefore the buyer will not be on the list of shareholders to which the company pays its dividends. Dividend payment is made on a separate date known as the dividend date, typically after the record date.
After the close on the day before the ex-dividend date and before the market opens on the ex-dividend date, all open good-until-canceled limit, stop, and stop limit orders are automatically reduced by the amount of the dividend, except for orders that the customer indicated "Do Not Reduce." This is done because the dividend payout will decrease the value of the company, as it comes directly from the company's reserves. At the market opening on the ex-dividend date, the stock will trade on an ex-distribution basis, adjusted for the amount of the dividend paid. If a corporation is distributing something other than a cash dividend, such as rights or warrants, then an ex-dividend date can be called an ex rights date, or ex warrants date, etc.
The key date for dividend-paying stocks, funds, or securities is the ex-dividend date. The Record Date, or Date of Record, determines the ex-dividend date, before which an investor must own the stock in order to receive the dividend. For the investor to receive the upcoming dividend the investor must purchase the stock prior to the ex-dividend date.
In the United States, the Securities and Exchange Commission stipulates that there are three days of settlement for stock trades.[3] The ex-dividend date is normally two business days (3 minus 1) before the record date. For the purpose of calculating an ex-dividend date, business days are days on which both the major stock exchanges and the banks in New York State are open.[4] Thus Columbus Day and Veterans Day are trading days, but not business days for calculating an ex-dividend date, since they are legal holidays and banks are not open.
If the record date is not a business day, then counting begins from the most recent business day instead of the actual record date.[5] For instance, if the record date is Sunday, then the ex-dividend date is the preceding Wednesday, not Thursday — assuming no intervening holidays.
The ex-dividend date is two business days prior to the record date. To be a stockholder on the record date an investor must purchase the stock before the ex-dividend date. The latest date he can buy the stock to be a stockholder on record and be entitled to the dividend would be one day prior to the ex-dividend date to allow for the three stock trading day settlement of the stock purchase. If the investor purchases the stock the day before the ex-dividend date the investor would be a stockholder on the record date and would be entitled to receive the dividend payment.[6]
An investor who wishes to be entitled to the dividend does not have to wait until after the record date to sell the stock; however, the investor must hold the stock until the ex-dividend date. If the investor were to sell the stock on the ex-dividend date or afterwards, the investor would still be entitled to the dividend payment. In this example, assuming that the investor purchased the stock one day before the ex-dividend date, the investor would be a stockholder on the record date. If the investor sells the stock on the ex-dividend date, the buyer of the stock would be a stockholder one day after the record date given the three stock business trading day settlement. The person that bought the stock would not be entitled to receive the dividend.
An investor only needs to own the stock for one day (the record date) to be entitled to receive the dividend payment. If the investor buys before the ex-dividend date, and sells on the ex-dividend date or after, the investor will receive the dividend payment.