In case you weren’t aware, or didn’t even know, a stock’s price will drop by the amount of its dividend payment on the ex-dividend date. Ex-Dividend literally translates to “without dividend”. If you plan on investing in dividend stocks, it’s important to know these dates to receive your dividend payments.
But why does this happen?
Let’s assume a company is worth $100 million dollars. Now what does this mean?
This means that if you wanted to take over and buy out the entire company, its current market price is $100 million dollars.
Apple’s $1 Trillion Dollar Worth
When you hear the news saying things like Apple Is Now Worth $1 Trillion Dollars, this is exactly what it means. If you wanted to buy Apple, you’d have to dish out $1 trillion.
Probably even more because you want to give them motivation to sell the company.
But how do they get this $1 Trillion price tag?
This is a simple formula of:
Share Price x Number of Shares Outstanding
This is also known as the company’s Market Capitalization or Market Cap.
So when Apple stock was trading at $208 on August 2, 2018, their outstanding shares was 4.848 Million, or 4,848,000,000.
Using the formula for Market Cap we get:
$208 x 4,848,000,000 = 1,008,384,000,000
This was Apple’s market cap on that day and hence it’s company’s value.
So Where Does The Ex-Dividend Come In?
So given that we know how to calculate how much a company is worth, now we can start to see why a stock’s price drops on ex-dividend date.
When a company pays out a dividend, they are taking cash out of their account and paying it to shareholders.
In some cases, this is literally reaching into the cash register, and paying out cash.
If a $100 million dollar company pays out $1 million dollars in dividends, that means $1 million cash is leaving the company.
Therefore, the company should no longer be worth $100 million dollars, but rather $99 million dollars.
Since the company’s market cap has dropped by $1 million, the company’s price per share will drop a proportional amount. This is why a company’s share price drops on ex-dividend date.
But Why Ex-Dividend Date?
Funny enough, the Ex-Dividend Date is not set by the company. The company is only responsible for three dates:
- Declaration date: the date they declare that they’re paying out a dividend
- Record date: the date they record all shareholders who will receive a dividend
- Payable date: the date they pay out the dividend
Investors who wish to earn dividends need to be on the books by the record date.
And since stocks take two days to settle, you need to purchase the stock two days before the record date.
Therefore, the Ex-dividend date is a result of the two-day settlement period. Because of this, the company does not set an ex-dividend date. If we had futuristic technology and processes and settlement occurred instantaneously. there would be no ex-dividend date. On the flip side if it took a whole week to settle a stock transaction, then the ex-dividend date would be a week before the record date.
When investing in your next dividend stock and trying to decide between two stocks, it might be profitable to pick the one with an upcoming ex-dividend date rather than one that has already passed.
14 thoughts on “Why Do Stocks Drop On Ex-Dividend Date”
Thanks for a great post and the little lesson on ex-dividends.
Very interesting! I don’t have a background in finance or own any stocks but this certainly helped me gain a better understanding of dividends.
My Dad wanted always to buy shares from a company that pay consistently high on dividends. I’m happy this post has came on right time. I’ll share this useful information with him.
Thank you so much for this, it answered so many of my questions!
I didn’t realize stocks were like cash until this post. I was thinking about investing in stocks, but still unsure because all the risks & it all looks so complicated.
Thank you for a very informative post, I do not know much about stocks or dividends. I appreciate the lesson!
Nero can you just manage my life please. You are so insightful and knowledgeable about everything financial. I use to work in the same world but life. Thank you for the reminder!!
Wow….”Market Cap” is Market Capitalization all along??? I had no clue, whatsoever. Thanks for the tip, Nero.
Great post Nero! You are the go blog for all finance info! Thank you for making it easy!
Wow! Great explanation! You made this very clear and easy to understand. Thanks. 🙂
SUMMARY: Bought a stock on 09/01… EX-DIV 09/28… RECORD DATE 09/30
QUESTON: Can you sell a stock on its RECORD DATE and be entitled to the dividend?
DETAILS: For example, if a stock’s RECORD DATE is 09/30, and you’ve owned the stock since 09/01, and on the RECORD DATE the stock opens at $10 and moments before the bell rises to $15 and you SELL the stock 1 minute before the bell (on 09/30) to capture the price increase, are you considered an OWNER of RECORD and entitled to the dividend? I’ve been told NO but that makes no sense since I “captured a real profit, owned it several day’s prior to its EX-DIVIDEND DATE and was able to sell the stock on the RECORD DATE (can’t sell what you don’t own, right?). If I’m not considered a stock owner on 09/30, how could I have profited on a stock I didn’t own on 09/30? Do you need to, by rule, buy a stock at least 1-day before the EX-DIVIDEND DATE and hold is PAST the RECORD DATE to be recorded as an owner of the stock to be entitled to its dividend?
Also, how does EX-DIVIDEND and RECORD DATE apply if this stock is bought and sold within a 401K, or other investment vehicle? I’ve been trying for two years to get a written copy of the RULE/POLICY on this with no luck from Schwab and phone calls give me different answers when I call them.
Thanks for the question! You must own the stock before Ex-dividend date in order to receive its dividends. You can buy or sell the stock whenever but you need to have the stock in your account on 9/27. On 9/28, you can sell it (or don’t, up to you). All that matters is that you kept it on 9/27.
The record date is the date the record in the books who owns the shares and are entitled to receive the dividends. It usually takes 3 days for a stock transaction to clear and get settled in the system. That’s why you need to own the stock on 9/27 so that they will record you on 9/30.
Ex-dividend dates affect all accounts the same way regardless of 401k or IRA.
Great info Nero. Just wondering though, you said the company doesn’t determine the Ex-date. Who does determine when the ex-date happens? Is it simply a function of moving three days ahead of the record date?
That’s correct. Systematically, it takes about 3 days after you buy a stock for it to settle. Once it’s settled then it’s in the company’s books and the company will pay dividends out to all shareholders. If they ever upgrade technology for instant settlement or 1 day settlement, we could see this change.