If you own any common stock, you usually get paid dividend. The payout usually happens once per quarter on the dividend payout date. But what happens if you sell your shares one day before the dividend date? Do you get paid the dividend, does the person you sold the shares to get paid, or do you split the dividends?
The answer is that whoever owned the stock on the “ex-div” date gets paid the dividend. The ex-div date is usually 3 days before the dividend payout date. The 3 days of period allows the corporation to figure out who they need to pay, take care of the paperworks, etc.
So, in theory, you could buy shares 1 day before the ex-div date, get paid the dividend, and sell the shares 1 day after the ex-div date, and make a significant profit. In practice, however, the price of the stock drops by the amount of the dividend on the day after the ex-div date (plus then some.) The presumption is that the price of the stock on the day before the ex-div date reflects the value of the stock plus the expected dividend payout.
There is a slight price discrepancy that occurs, however, if the dividend payout is a sub-penny price. For example, if the stock trades at $1.00 on the day before the ex-div date and the dividend payout is $0.115, then the value of the stock on the day after the ex-div date should be $0.985. However, the market rule prohibits trades at sub-penny increments ($0.005 portion of $0.985), so all the computer systems on Wall Street will automatically round the limit price of every single order in their systems. Every single system will round in the same direction, but I can't remember whether they round up or down.
I used to think you can make use of this rounding pattern to buy/short stocks just before the ex-div date and sell/cover on the following day to make $0.005/share profit. However, this is not the case because the market price of a stock generally dips by slightly more than the amount of the dividend on the day after the ex-div date.
