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The ex-dividend date, also known as the reinvestment date, is an investment term involving the timing of payment of dividends on stocks of corporations, income trusts, and other financial holdings, both publicly and privately held. For sales before this date, the dividend belongs to the new owner; for sales on or after the date, the seller is entitled to the dividend.
Many publicly traded companies, and some privately held ones, 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 holders of shares as shown on the share register at the record date. However it takes time for a stock purchase to be recorded on the register. 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. However if for whatever reason a share transfer prior to the ex dividend date is not recorded on the register in time, the seller has to repay the dividend to the buyer when he receives it. Thus the key date is the ex-dividend date.
In the United States, the IRS defines the ex-dividend date 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." 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."
After the close of business 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 at a lower price, 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 the relevant date is called an ex rights date, or ex warrants date, etc.
In the United States, the Securities and Exchange Commission stipulates that there are three days of settlement for stock trades. 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. 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. 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 (this includes extended hours (pre-market and after-hours) of that day) 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.
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.
These rules are different for special dividends over 25%. See that article for details.
For shares listed on the London Stock Exchange, the ex-dividend date is two business days before the record date. The ex-dividend date is almost always on a Wednesday with the associated record date on the following Friday. Exceptions to this timetable are usually special dividends, and dividends provided by overseas issuers who only have a secondary listing on the London Stock Exchange.
- "Glossary: E". London Stock Exchange. Retrieved 21 December 2010.
- "Mutual Fund Distributions". Publication 564. Internal Revenue Service. 17 February 2010. p. 2. Retrieved 21 December 2010.
- "About Settling Trades in Three Days: T+3". Securities and Exchange Commission. Retrieved 6 December 2011.
- "NYSE Rule 12". FINRA Manual. FINRA. Retrieved 2011-03-10.
- "NASDAQ - 11140. Transactions in Securities Ex-Dividend, Ex-Rights or Ex-Warrants". NASDAQ Equity Rules. NASDAQ. Retrieved 2011-03-10.
- "Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends". Securities and Exchange Commission. Retrieved 6 December 2011.
- "LSE Dividend Procedures". London Stock Exchange. Retrieved 28 July 2013.