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i know that, after paying dividends, a company stock price is adjusted down accordingly. i have CAT stock. they just paid dividends. so can someone tell me how it is adjusted from yesterday? i can not be sure how to calculate with all the after hour or premarket prices etc...
The stock price is not deliberately adjusted down, in any formulaic way. Rather, the fact that the dividend has been paid means that the stock is actually worth less, and so buyers start offering a lower price.
Think of it this way. On Monday, I offer to sell you a rare collectible box which just happens to also have $Y in it, and the price is $X. On Tuesday, the $Y is gone, so if the $X was a reasonable price on Monday, the reasonable price on Tuesday is going to be $X - $Y.
ok thanks and i totally understand your logic. so you are saying, there is no official, mandatory adjustment done? so after the dividend payment, it is totally up to the market and investors again to determine the price? somewhere i had read that SEC makes sure the prices are adjusted accordingly. i dont remember what it said exactly but that made me think SEC is making adjustment to it..
Share prices do not adjust downward to reflect the dividend being paid out. To believe that is to make the fundamental error of confusing book value with stock price.
The stock price is not deliberately adjusted down, in any formulaic way. Rather, the fact that the dividend has been paid means that the stock is actually worth less, and so buyers start offering a lower price.
Think of it this way. On Monday, I offer to sell you a rare collectible box which just happens to also have $Y in it, and the price is $X. On Tuesday, the $Y is gone, so if the $X was a reasonable price on Monday, the reasonable price on Tuesday is going to be $X - $Y.
not true, actually the offers are automatically reduced by the exchanges computers by the amount of the dividend for the next opening.
exchange rules require the reduction,. below is right from the horses mouth.
Yes, Dividend Payouts Reduce Share Prices because it's using company's net income to distribute the cash dividends which makes the cash on the balance sheet less attractive.
Usually there are only 3 things the company can do with the net income it generates.
1) Pay dividend.
2) Buy back shares of its stock (Will increase stock price)
3) Re-invest (buy other companies, which generate even more net income in the future)
In order to get good growth, #3 is the best option, but they shouldn't just blindly go out and buy companies, it must add valued to the company.
New orders have nothing to do with the dividend mechanics anymore than a mutual fund distribution after the drop .. Once the exchange drops the prices the market takes it from that lower point on a roller coaster ride for the rest of the quarter either up or down from there..
the next payout happens , the drop happens and the markets run with it again.
The opening tone is set each quarter by the mandated drop lowering all orders in the system. once the first order is excuted at that lower price it is the same as any other drop in price and all orders are based around that new lower price until they drift up or down from there.
The only thing being disputed is that the drop is not random or optional as you stated, it is an official , controlled mandated drop carried out by the exchanges no different than a mutual fund..
Last edited by mathjak107; 08-21-2013 at 10:59 AM..
Actually, that's a terrible article. The author is so misguided that he's looking at the declaration date and the payout date rather than the appropriate one, which is the ex-dividend date.
The major U.S. exchanges DO adjust standing orders downward by the amount of the dividend, but that is just one moment in time and, like Mathjak says, whatever happens after that is up to the market.
"Standing orders" - what does that have to do with the OP's question?
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