An ex-dividend determines which shareholders will be paid a dividend distribution by a publicly traded company. Since many stock shares exchange hands or trade quite frequently, a dividend-paying company needs to set a cutoff date that determines which shareholders are eligible for the payout. Dividends represent part of an investor's overall return in a stock, and therefore an ex-dividend becomes increasingly valuable to the individual or institution holding a security when distributions are given.
Companies pay dividends out of current earnings or ongoing profits. These payments are benefits and not a requirement at any publicly traded entity. Before a distribution can be given, a company's board of directors must approve the payout.
Dividends are paid either in cash or stock, although the majority of distributions are primarily made in cash. If a company does not have the cash reserves to make cash distributions but still wants to reward shareholders, it might make those distributions by granting investors additional shares of equity. Sometimes, if cash or stock are not an option, a company might make a distribution to shareholders in the form of a product or service that it provides.
Stocks can be traded at will by investors, as long as there is a buyer and seller participating in each transaction. In order to keep track of which investors are holding equity in a company, management maintains a list containing holders of record with information on all shareholders. It takes up to three days for a change of ownership in stock to be recorded after an original buy or sell trade has been made. As a result, confusion could easily arise as to who is eligible to receive a company's cash or stock dividend payout.
This is where the ex-dividend comes in to play, and there are several events surrounding the landmark. A company's ex-dividend is declared on a certain date on the ex-dividend calendar. This date determines when a dividend-paying stock begins trading with no dividend, for all intents and purposes. It means that if shareholders purchase a stock on or after the ex-dividend date, they are not eligible for the most recent dividend distribution. Also, if an investor sells a stock on or after the ex-dividend date, he or she is no longer eligible for that most recent dividend payout.
The day that a company reveals its intentions to make a dividend distribution to its shareholders is known as a declaration date. This is important because this is the date that a shareholder would like to be in the company's holder-of-record list. Otherwise, they will not receive a dividend. In order for a shareholder's name to appear on that list, he or she must purchase the security at least three days before the date of record, which is the day a company examines its holder-of-record list to determine who receives a payout. The date of record falls one day before the ex-dividend date.