What it is:
How it works (Example):
When a company declares a dividend, it sets a record date when you must be on the company's books as a shareholder to receive the dividend. Once the company sets the record date, the stock exchanges fix the ex-dividend date.
The ex-dividend date is normally two business days before the record date. If you purchase a stock on or after its ex-dividend date, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you will get the dividend.
Here is an example:
On July 27, 2010, Company XYZ declares a dividend payable on September 10, 2010 to its shareholders. XYZ also announces that shareholders of record on the company's books on or before August 10, 2010 are entitled to the dividend. The stock would then go ex-dividend two business days before the record date.
Why it Matters:
In a nutshell, if you buy a stock before the ex-dividend date, then you will receive the next upcoming dividend payment. If you purchase the stock on or after the ex-dividend date, you will not receive the dividend.
With a large dividend, the price of a stock may move up by the dollar amount of the dividend as the ex-dividend date approaches and then fall by that amount after the ex-dividend date. A stock that has gone ex-dividend is marked with an "x" in newspapers on that day.