On the ex date the stock should theoretically drop from the previous day's close by the amount of the dividend it's about to pay. I've analyzed many stocks on and around their ex date and at least half the time, they don't go down at all. Is there any reason or explanation for this? I realize that the price of a stock is determined by those trading it, so is it possible that the laws of supply and demand are overpowering suggested behavior? :eek:
Maybe possibly due to the fact that those companies that do pay dividents are primarily utilities/dull companies that are mostly held by institutions and thus there is not many sellers to drive the price down.
Think of it this way. If a stock pays a 20 cent dividend and on it's ex-date it opens unchanged it has actually opened 20 cents higher. So your observation is that many times a stock opens higher than its previous close. The fact it's on an ex dividend date is a coincidence. Stocks gap up and down all the time, it's just market noise.
The key word in that sentence is "theoretically". If we held all other things constant then the stock would open lower by the amount of the dividend. However, there are many dynamic factors that affect the stock price, so just because the stock went ex-dividend does not automatically mean that it will open lower by the amount of the dividend.
GM, and CVX are two that jump into my head, but if you want more I could give you 20 others. ok, good point..., so basically the laws of theoretical behavior bow to supply and demand. I only mentioned it because you would imagine that the stock would drop to take the arbitrage opportunity out of the market.
One more quick question: If you own a stock that is paying a dividend as stock reinvestment, in other words, you receive the dividend in the form of stock, would you receive those additional shares on ex-dividend day, or on the pay date? If you don't receive them until the pay date, what would happen if you sold your current shares between the ex-date and the pay date, do you still get the additional shares come pay day? Thanks (just a bit confused...)
Sorry about that, youâre right, GM did open down, but there are many others that didnât. Iâm not saying that it never happens, but I couldnât understand why the market was behaving inefficiently. It sure is! But the thing is, now that youâre short you have to pay the dividend rather than receive it, so this offsets the gain from shorting. The market is basically set up so that there is no free money. Even buying puts doesnât really work, Iâve looked into it. But I am still wondering about the rules for stock reinvestment dividends as asked above? Anybody know anything?