What is an Ex-Dividend Date?
Companies pay dividends to their shareholders for holding/owning shares in the company. Dividends are the royalty or a form of benefit, usually paid in money to the shareholders of a private or public company. Dividends can also be in the form of re-investments whereby shareholders buy more shares in the company with the dividend money. The shareholders are the owners of a company who have bought shares in that particular company and therefore get dividends in return for their investment and also get voting rights in annual general meetings.
The Directors of a company, who oversee the day to day operations, have the power to declare dividends when they see fit and can also choose not to declare dividends for a particular period. Nonetheless, companies usually pay dividends twice a year, the first one is for the half year performance and the second is for the end of year performance. There is a set date given on which the dividend will be paid, usually known as the record date. However, for publicly traded companies i.e. shares of companies that trade on stock exchanges, such as the New York Stock Exchange, a problem arises as once a dividend is declared for a particular period by a company, and if the owner wishes to sell their shares in that company, does the owner/seller of the shares get paid the dividend declared or should the buyer/new owner?
Thus, in order to be fair in dealing with this issue, stock exchanges around the world have come up with the “Ex-Dividend Date”. This date can also be called the dividend cut-off date and basically means that the owner/seller of shares, will need to pass on the dividend benefits to the buyer if the shares are traded between the two parties before the ex-dividend date. If the shares are traded between the parties after the ex-dividend date, then the benefit of receiving the dividend remains with the owner/seller and the buyer is not entitled to the current dividend, but to the next dividend, if declared by the particular company.
In general, the ex-dividend date is set two or three days prior to the dividend payout/record date. This is simply because of the time that is required to process the transfer of shares from one party to the other. Thus, in order to be classified as the owner of a share of a particular company and be entitled to the dividend being paid for a particular period, a buyer needs to purchase the shares before the ex-dividend date. If a buyer buys a share after the ex-dividend date but before the dividend payout/record date, the seller remains the beneficiary of the dividends paid for that period and the buyer receives no dividends for that period.