9

If the price of a share automatically declines the same amount as the dividend on the ex-div. date why don't people short the stock right before the ex-date and then when the share price drops relative to the div. payout cover the short and make a profit. Example, shares of Company A are trading at $10.00 a share on Dec 2, Gordon Gekko decides to short the stock. On Dec 3 the stock goes ex-div. and Company A is paying a 10% div or $1.00 per share. Because of this the stock opens at $9.00 a share to reflect the dividend. Why can't GG cover the short at $9.00 and walk away with a $1.00 per share profit? Is this illegal or is there some regulation to prevent this?

13

When you short a stock and the stock goes ex-div. you have to pay out an amount equal to the dividend. So in your example, GG would short the stock at $10.00, buy back at $9.00 and be charged $1.00 for the dividend. Net effect $0.00.

  • 6
    Yes and in effect, since one is borrowing the stock from someone who would have received the dividend payment, one needs to make an equivalent payment to them to keep them whole. If it weren't so, there wouldn't be stock available for shorts to borrow. – Chris W. Rea Nov 19 '13 at 20:31

Not the answer you're looking for? Browse other questions tagged or ask your own question.