First, what is stock?
Stock consists of the shares of which ownership of a corporation or company is divided. The total number of shares allows the owner to hold respective proportional ownership.
The owners may want additional capital to operate and expand the business. They can achieve these goals by selling shares in the company to the general public. The purchase of shares means fractional ownership, fractional decision-making power, and potentially a fractional profit, which the company may issue as dividends.
Currently, you can trade stocks through regular stock exchanges or conduct speculation through Contract For Difference (CFD).
What is dividend?
A dividend is a distribution of profits by a corporation to its shareholders, approved by its board of directors. Most relevant dividend frequencies are yearly, semi-annually, quarterly and monthly in cash, new shares, or other equivalent assets.
It is important to keep in mind that not only stock CFDs of Apple, Amazon, IBM, etc. but index CFDs such as SP500, JPN225, etc. also adjust as a result of the dividend payment. Because Index CFD is made up of a pool of stocks that may pay dividends throughout the year.
CFD traders are entitled to the dividend adjustment as long as their long/short positions pass the ex-date. The economic effect for CFD holders before the ex-date will be generally reflected as if they had been holding the underlying security.
Note: Ex-date or ex-dividend date is the day after the last day to trade with the dividend. Trading on ex-date, traders are not entitled to the dividend.
Why do companies pay dividends?
Simply put, dividends are a way for companies to share their profits with investors. Dividends indicate stable business and growth prospects. Companies can use dividends to reward investors and entice them to stick around.
Dividends can be an excellent way of attracting investors as an income from the stock regardless of what happens with its price. Dividends are an especially important tool during seasons when share prices are stagnant or decreasing, as investors still have a way to make a profit. In fact, dividends can entice more investors during these seasons.
Dividend adjustment on the ex-dividend date
Dividends may impact the amount of overnight costs you pay or earn on your Index CFD positions.
A dividend causes the share price to fall, as the company is moving money from itself to its shareholders. On the ex-dividend date by the amount of the declared dividend, the value of the stock will drop and so does the value of the index.
Short positions will be positively impacted by the drop in Index Price, while long positions are negatively impacted. At the time, positive or negative adjustments are applied to neutralize the impact of the drop in the index price.
Regarding a Buy order, the trader gets a dividend. And with a sell order, the trader pays a dividend corresponding to the position size.
Dividend adjustment = Dividend * Contract size * Trading volume
- A trader opens a JPN225 position.
- 1 lot trading volume and the Contract Size is 10.
- Dividend is paid 224.3 USD on September 29, 2022.
Dividend adjustment = 224.3 * 10 * 1 = 2243 USD
You have had an overview of stock, dividend, and dividend adjustment when holding CFDs on the ex-dividend date. We hope you will make the best trading decisions with this article. Create an account here and start trading today at FXCE!