Securities Industry Essentials (SIE) ExamUnderstanding Products and Their RisksMedium
A client owns 100 shares of XYZ Corp. common stock. XYZ Corp. announces a cash dividend of $0.50 per share. On the ex-dividend date, the stock's market price will typically adjust by approximately:
- AIncreasing by $0.50 per share
- BDecreasing by the dividend yield percentage
- CRemaining unchanged
- DDecreasing by $0.50 per share
Show answer & explanationAnswer & explanation
Correct answer: D. Decreasing by $0.50 per share
On the ex-dividend date, the stock's market price is typically reduced by the amount of the dividend. This is because buyers of the stock on or after the ex-dividend date will not receive the announced dividend, which essentially reduces the value of the stock by that amount.
Why the other options are wrong
- A. The stock price decreases, it does not increase, as the dividend is no longer included in its value.
- B. The adjustment is by the absolute dividend amount, not a percentage of the dividend yield.
- C. The price does not remain unchanged; the dividend's value is removed from the stock price.
Ex-Dividend Date
The first day a stock trades without the right to receive a previously declared dividend. Purchasers on or after this date will not receive the dividend.
- Determined by FINRA/exchanges, usually one business day before the record date.
- Stock price typically drops by the dividend amount on this date.
- Crucial for determining who receives the dividend.
Memory trick: DERP: Declaration, Ex-dividend, Record, Payment.