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?


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.

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    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

I am relative newbie in the financial market trading and as I understand it, the response from Victor is accurate in respect of trading CFD contracts. However, there is also the option to 'trade' through a financial spread betting platform which as its name suggests is purely a bet based upon the price of the underlying stock/asset. As such, I believe that your theory to short a stock just prior to its ex-dividend date may be worth investigating further... Apart from that, it's worthwhile mentioning that financial spread betting is officially recognised by HMRC as gambling and therefore not currently [2015/16] subject to capital gains tax. This info is given in good faith and must not be relied upon when making any investment and/or trading decision(s). I hope this helps you make a fortune - if it does; then please remember me!

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