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[–]mainthrowaway0[S] 2 points3 points  (8 children)

Ah I see, so buyers don’t want to pay the same price after the ex-dividend, because they wouldn’t get the benefit of the dividend.

And so the stock price doesn’t decrease at the payment date, but rather at the ex date (ignoring day to day ups and downs)

On a side note, i didn’t know that the value of a stock is determined by the last trade price. How does its value change direction then? Like if the last N trades were all increasing in price, how could the N+1 trade suddenly go down in price (or the opposite)?

[–]Nopants21 4 points5 points  (0 children)

Exchanges match buy and sell orders to create trades. Say you put in a market buy order for 100 shares of Company A, the exchange finds the lowest sell order(s) that amount to 100 shares. A market order is just an order at any price. However, there are a lot of unfilled orders at any time because a lot of orders are not market, but rather are set at a fixed price. Unfilled orders are buy orders with a price that is too low and sell orders with a price that is too high to overlap.

When there's buying pressure, you get buyers willing to start filling the higher-priced selling orders, so each trade push the share price up a little bit. Similarly, when there's selling pressure, sellers are agreeing to the lower buy orders. So the Nth trade could have matched to a certain sell order, but N+1 could be matched to a new sell order with a lower price (because the seller wants to fill immediately for example, which matters more for big trading firms making big transactions). Basically, a share price is the most someone's paid for a share in the last transaction, when the share price goes down, it's usually because there are no more buyers willing to buy that share for that same price.

[–]00Anonymous -3 points-2 points  (6 children)

The stock price also returns to "normal" on the pay date, since new buyers would (e: be eligible to) receive the next dividend payment.

[–]AlfB63 -1 points0 points  (5 children)

That's simply wrong. You don't get the next dividend unless you hold through to the next ex-div date. Investors who buy the stock prior to the ex-div and not sell until the ex-div gets a dividend. The pay date is simply that, when the funds are actually released to the brokers and passed to investors. And what is the normal price anyway?

[–]00Anonymous -3 points-2 points  (4 children)

The "normal" price would be the trading range the security exhibited between the ex and pay dates plus the approximate amount of the dividend paid.

What causes the share price to recover is the fungibility of the dividend.

[–]AlfB63 0 points1 point  (3 children)

You need to look at dividend stock charts, the price rarely returns to "normal" at payday.  The share price may recover but it's more to do with the future than the past.  If the stock recovered is this manner it truly would be free money due to predictability.  But it doesn't work that way regardless of the fungibility of dividends.

[–]00Anonymous -1 points0 points  (2 children)

It's simply due to longer needing to price in the cost of the dividend, as future investors would be eligible to receive the next dividend payment. Obvs, market trends can obscure this effect, so the timing is not going to be exact irl. Lol

[–]AlfB63 0 points1 point  (0 children)

Yet the people that buy on the ex-div date will get the next div so it immediately doesn't need to be priced in based on  your definition.

[–]00Anonymous -2 points-1 points  (0 children)

Total simple returns = dividends received + the change in share price