You must Sign In to post a response.
  • Category: Stock Market

    Why does stock always correct after ex-dividend date?


    Have a query regarding stock market? Want to know more about changein stock post ex dividend date? Find responses from experts on this ISC page.

    I am investing in the stock market and many times I have observed that once the ex-dividend date is over, the stock falls on the same day. What is the reason? Why do people start selling their positions or stock on the ex-dividend day? Does this always happen?
  • Answers

    7 Answers found.
  • A profit making company generally declares dividend every year and some even pays interim dividend. Investors are really interested in this amount, but only those who are holder of company's share before this ex-dividend date are eligible to get this amount. Or we can say that those who became holder of company share on and after ex dividend date can not get dividend, as this is a date before record date(a date on which company acquires details of its share holders). Thus if credibility of company is very high and its yearly dividends are very high on the basis of past trends then period before ex-dividend date is like a golden period for all its investors.

    It's generally said that sentiment of market depends upon psychology of investors, those who are genuine investors focuses on value of share(on basis of real value of company) such dividend decisions does not affect them. But there is also a section of investors who are focused on earning dividends for short term gains and dividend decisions of company affects them. They are ready to pay extra premium on purchase of shares as generally share prices rises by amount of dividend before ex-dividend date. Market starts turning greedy at that time and hence shares of that particular company are really high priced. But as after ex-dividend date new owners of shares are not entitled to any gain and hence the demand for that particular share falls down. Also those who are holder of share on record date would be entitled to amount of dividend and hence selling shares after record date does not affects such investors whose main motive is to receive investment. Therefore, in market supply of shares rises but there demand is not that much which led to fall in their prices generally by the amount of declared dividend.
    But I feels that if you are genuine investor and really focused on value of company , then losing positions is not good. A share price always shows ups and downs within a range and hence it is even good to invest in shares of those companies whose prices tends to remain high most of the times and falls after ex-dividend date because be greedy when whole market is fearful.

    Decision of paying extra premium on purchase sometimes proves wrong when dividend declared is less then the expected price but market is all about analysis and applications of past experiences to predict the future.

  • The ex dividend date is an important date and the dividend goes to the person who holds the shares in his name on that date. A person who wants to have the advantage of dividend has to buy the share before that date and if he buys after that date he loses the dividend but gets the shares at a reduced price. This is the reason that there is a difference in the share price between the before and after price of the stock by exactly the amount of the dividend.

    The interesting thing to note is that people are buying the share before the ex dividend date to earn that dividend and no one will buy them the next day at the same price when the advantage has gone to the original holder.

    Not only dividend same thing happens in case of ex right or ex bonus dates whenever a company announces right share or bonus share.

    Let me explain it with an example of a bonus share announced by a company in the ratio 1:5 ratio (1 bonus share for each 5 held). So if the share price before the ex bonus date was Rs 600 then after this date it would come down to (5 x 600)/6 = 500.

    So the advantage of getting bonus shares will be only to those who have the shares in their name by the ex bonus date.

    It seems logical also as no one can have dual benefits and date is the crucial factor in deciding that.

    Knowledge is power.

  • Stock prices normally fall after the declaration of the dividend since the company is utilising as a part of the reserved resources and cash balance for the payment of dividends which is to be paid along along with it. Due to such an operation, accumulated profit is likely to erode to the extent of dividend payout.
    However, there is a lot more apart from it. Dividends are declared in the company board meeting generally on the day of Annual/ Quarterly results. A future date is finalised when all the shareholders on that record date are entitled to enjoy dividends since the record dates are indicative of future results and not for the past. The market can buy all the shares of the company in such a way that they become the shareholders of the company by the record date. You may witness that on the event of declaration of the dividends, the buying activities are on the rise thereby pushing up the prices.
    After the record date, the buyers having purchased the stock solely for getting dividends will now sell the stock .Even though the dividends are to be paid out on the future date, the payments are made on the basis of shareholders list on record date. At this point, the prices are likely to fall.
    To sum up, there are many factors operating in the play and it becomes impossible to isolate the impact due to the dividends. Apart from this, there are certain companies paying dividends consistently and the expectations may push up the prices upwards. In that situation, prices would not drop.

  • The companies that made profits during the previous financial year declare dividends to the share holders. If a company is paying a regular dividend every year it is an indication that the company is doing well and worth investing in that company. But there are other factors also to be considered for purchasing. Some companies increase the dividend percentage. This is an indication that there is an increase in the profit. This makes the company popular in the stock market. On the contrary, decreasing the percentage of dividends or not giving any divide indicates that the company is not doing well. Generally, companies pay dividends in the form of cash and the same will be deposited in your bank account or you may receive a cheque. Sometimes some companies instead of giving cash they may give additional shares.

    The company which is declaring a dividend will first declare the dividend amount and the date of payment. The company will also publish the last date to purchase shares to become eligible to receive the dividend for that financial year. This is the ex-dividend date. This date generally will be one business day before the date of record. The date of record is the date when the company reviews its list of shareholders. The people who are interested to purchase the shares will go for purchase before that date. So there will be an increase in the share price. Generally, the increase will be equivalent to the dividend per share. On the Ex-date, the price will come back and the reduction will be equivalent to the dividend per share. This will be done to indicate to the buyers that they are not eligible for dividends for that year. if the buyers are optimistic about the company performance the price increase before the Ex-date will be more than the dividend amount. This may result in a net increase after ex-date even after the reduction of an amount equivalent to dividend per share.
    If company issues shares instead of cash as dividends the number of shares in the market will increase and that will result in the drop-down of the price after the Ex-date.

    Before investing one should see what is the price before the company announced the dividend and what is the price after the Ex-date. If the Ex-date price is more than the original price, it indicates the company is doing well and we can think of going for that stock.

    drrao
    always confident

  • The Board of Directors meeting will choose to declare dividends to the company shareholders. The same will be formally declared and communicated to the Stock Exchanges also. However the actual payment of dividend will take place at a later date only.

    But the company shares will be trading the stock exchange regularly during and after this dividend declaration. The dividend will be paid to the actual shareholders on whose name the shares stand on the date of payment of dividend. As the shares are regularly traded, the shareholders will be changing. Hence the company will announce a particular date as Record Date.

    So all those whose name the company share stands on the record date will get dividend. But when shares are being traded it needs a couple of days to get transferred from the seller to buyer's name. Earlier there was a need of physically transmitting the paper shares. But after dematerialisation, it is faster as it needs only accounting and electronic record making in the concerned Demat account.

    Thus nowadays, the shares getting transferred from the name of seller to buyer on the third business day. So shares bought on the 'third day back from the Record Date will get into the record and the new buyer will be eligible for the declared dividend. The shares thus bought from the day previous to record date will not be eligible for dividend. So they are sold ex-dividend or without eligibility for dividend

    Hence one day before record date is declared as Ex-Dividend date. If a share is sold or bought as Ex-dividend it means that the buyer will not get the dividend declared on it. . "The ex-dividend date of a stock is the day on which the stock begins trading without the subsequent dividend value". As the buyer knows that he will not get the dividend, he will be ready to pay only a slightly lesser amount for the share factoring the dividend. All subsequent buyers may have to wait for more time for getting dividend on the same share. i.e until the next declaration of dividend.
    Hence it is generally seen that share prices undergo a fall after ex-dividend date.

    Let me give a real market example
    Goodricke Group -Final 30.00 - Dividend Announcement date 26-06-2021;Record date 08-09-2021; Ex-dividend date-07-09-2021.
    The above company declared 30% final dividend on26 June 2021. It will pay dividend to all the shareholders whose name appears in its shareholding records as on close of business on 8th September2021. So the ex-dividend date is 7th September 2021. Only those shares traded up to 6th Sept will get the dividend.

    Though generally a price fall is seen after ex-dividend date, it can be otherwise too, because share prices are influenced and impacted by various other factors also., not just by dividend payout alone.

  • Before diving into the Ex-Dividend date, let me explain you about the Record date. Many people are buying and selling shares in the share market, leaving the market price volatile. Everything will be going fine until the dividend payment arises. There the company has to decide to whom the dividend has to be paid. To clear out this confusion, every company brings in the term "Record date". It is a particular day set by the company in order to keep a record of the shareholders of the company as on that date, so that it could determine to which shareholders it has to pay the dividend. Ex-Dividend date or Ex-Date is the day immediately preceding the record date. The shares bought on or after the ex-date are not eligible for dividend. One will be eligible to get dividend on the shares purchased, only if the person has bought the share before the ex-date. This is because since the shares are traded in the share market on T+2 days basis. That is, if a person buys a share just before the ex-date, he will get the shares after 2 days (on the record date). Thus he will be eligible to get the dividend on those shares. Let me tell you the scenario:

    Let's assume Mr. A, a shareholder, has bought 100 shares of AD company on 7th june, 2021. The share price is Rs. 100 and the company has declared dividend of 30% on its shares. The company has set its record date as 9th June, 2021, making it's ex-dividend date as 8th June, 2021. Therefore, Mr. A has bought shares on 7th, and he will receive the shares on 9th June (T+2 days). Hence, he will be recorded as the company's shareholders as on that date, and will be eligible for the dividend receipt.
    Thus, the shares bought on or after ex-date (8th June) will be credited to the person's demat account after 2 days (10th June). He/She will not be in the record of company's shareholders, and won't be eligible for the dividend.
    Next is the drop of market price after the ex-date. Some people buy shares with an intention to make short-term profits, some plan for long-term investment. Some buy shares to get a decent dividend in addition to their profits. This will be mostly in the case of short-term traders. So when the ex-date is over, those people tend to sell the shares quickly, leaving an increase in the supply of shares. Therefore, the value of shares will fall down due to the insufficient demand for the shares. Yes, this happens most of the times, particularly because short-term traders play a vital role in the market price of shares.

  • Very interesting question asked here by Dr saheb, it is fact that share price also reduced after Ex-dividend date. Because in every share there is a part of profit of that company which is paid to the holder/owner of that share at a given date.
    Now if you purchase the share with cum-dividend status, then only you will received the dividend money for the share of a particular year.
    So if the dividend amount is Rs. 10.00 per share, the market price of share may goes reduced by Rs. 10.00 on that date due to dividend impact.
    To know in details you have to understand the following:-
    1.Share is traded in the stock market at its market price but dividend is paid on its face value. You invested in share of a company where there is profit , so that you will earn a share of profit of the company in the form of dividend.
    2. To be an eligible dividend receiver, you must hold the share up to cum-dividend period or otherwise your name will be in the list of shareholders on the date of 'record date 'I, e 3 working days before the date of Ex-dividend start. Suppose record date is 5th July, 2021 then 3rd July, 2021 will be Ex-dividend date and transaction up to 2nd July, 2021 will be treated as Cum-dividend date. So you must purchase the share within 2nd July so that your name will appear in the shareholders list on record date I. e. On 5th July'21 to receive the dividend.
    So if the dividend per share is Rs. 10.00 , then who will purchase that share on 3rd July, 21 will not get the amount of dividend of Rs. 10.00 on or after 3rd July'21. Accordingly value of shares will decrease from 3rd July, 21 due to the amount of dividend.
    I think one can easily understand the situation now.

    Believe in the existence of God the super power.


  • Sign In to post your comments