[Beginner's Guide] Why Stock Prices Drop on the Ex-Dividend Date

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jaehee] Company A experiences a decline of over 5% on the ex-dividend date

When reading securities-related articles, you may often come across phrases like this. What exactly is the ex-dividend date, and why does the stock price tend to fall on this day?

What is the ex-dividend date?

The ex-dividend date simply refers to the day after the dividend record date, which determines who is eligible to receive dividends.

For example, suppose you own shares of a company called A Electronics. The shareholders of this company will receive dividends, right? To receive dividends, you must hold the shares on the dividend record date. The record date is the day when the shareholder registry is finalized, and it takes two business days to be listed on the shareholder registry.

In other words, you must own the shares at least two days before the dividend record date. If the dividend record date for A Electronics is December 30, you must hold the shares until at least December 28 to be eligible for dividends. If you buy the shares on December 29, you will not receive the dividend. This day is called the ex-dividend date.

Why does the stock price fall on the ex-dividend date?

After finalizing the shareholder registry to receive dividends, many shareholders sell their shares, causing the stock price to frequently drop on the ex-dividend date.

Typically, U.S. companies pay dividends quarterly, so shareholders must hold shares during those periods to receive dividends. However, in the case of domestic companies, holding shares only on the annual dividend record date entitles shareholders to the same dividends as those who held shares throughout the year.

Therefore, for domestic stocks, stock prices tend to rise as the year-end dividend record date approaches, and then sharply fall on the ex-dividend date, which is the day after the record date.

What is the rights issue date?

You may also come across the term "rights issue date" in articles, especially those related to capital increases.

When a company issues new shares, it sets a specific date and grants shareholders who hold shares by that date the right to subscribe to the new shares. Shares purchased after this date are said to be on the rights issue date, meaning the right to subscribe to new shares is lost. The rights issue price is usually set lower than the previous day's closing price, reflecting the expected dilution from the capital increase.

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