Cum Dividend: Explained | TIOmarkets

BY TIO Staff

|July 4, 2024

In the world of trading, there are numerous terms and concepts that traders must familiarize themselves with to navigate the financial markets effectively. One such term is 'Cum Dividend', a Latin phrase meaning 'with dividend'. This term is used to denote a period during which a buyer of a security will be entitled to receive a recently declared dividend. This article will delve into the intricacies of the Cum Dividend concept, providing a comprehensive understanding of its implications in trading.

Understanding the Cum Dividend status is crucial for traders and investors alike as it directly impacts the decision-making process related to buying and selling securities. It can influence the price of a security and can be a determining factor in the timing of a trade. In the following sections, we will dissect the Cum Dividend concept, its significance, how it works, and its impact on trading.

Understanding Cum Dividend

The term 'Cum Dividend' is derived from Latin, where 'Cum' means 'with' and 'Dividend' refers to a distribution of a portion of a company's earnings to its shareholders. When a security is said to be trading 'Cum Dividend', it signifies that the buyer of the security will receive the upcoming dividend that the company has declared.

This status is important because it directly influences the security's price. When a company announces a dividend, the price of the security often increases by approximately the amount of the dividend, reflecting the upcoming payout. However, once the security goes 'ex-dividend', meaning the dividend has been paid and the next buyer will not receive it, the price typically decreases by about the same amount.

Dividend Declaration and Payment Process

Understanding the Cum Dividend status requires a grasp of the dividend declaration and payment process. When a company earns a profit, it can choose to distribute a portion of these earnings to its shareholders in the form of dividends. The board of directors of the company decides the amount of the dividend and announces it to the public.

Once the dividend is declared, the company also announces a 'record date'. Only shareholders who are on the company's books as of this record date will receive the dividend. However, because it takes a few days for a trade to settle and the new owner to officially become a shareholder, the actual cut-off date for being entitled to the dividend is a few days before the record date. This is known as the 'ex-dividend date'.

Ex-Dividend Date and Cum Dividend Period

The ex-dividend date is the date on which the security starts trading without the dividend. If you purchase a security on its ex-dividend date or after, you will not receive the upcoming dividend. Instead, the seller will receive it. The period between the dividend announcement and the ex-dividend date is known as the Cum Dividend period.

During the Cum Dividend period, the security's price usually reflects the upcoming dividend. This is because buyers during this period will receive the dividend, effectively reducing their net investment amount by the dividend amount. After the ex-dividend date, the security's price typically drops by about the dividend amount, as the upcoming dividend is no longer a part of the package for the buyers.

Implications of Cum Dividend in Trading

The Cum Dividend status has several implications in trading. It affects the timing of trades, the pricing of securities, and the strategy of traders and investors. Understanding these implications can help traders make more informed decisions and potentially enhance their trading performance.

Firstly, the Cum Dividend status affects the timing of trades. Traders who wish to receive the dividend must ensure that they purchase the security during the Cum Dividend period. If they buy it on or after the ex-dividend date, they will not receive the dividend. Therefore, the announcement of a dividend can trigger buying activity, leading to increased trading volume.

Impact on Security Pricing

The Cum Dividend status also impacts the pricing of securities. During the Cum Dividend period, the security's price usually includes the dividend amount. This is because buyers during this period will receive the dividend, effectively reducing their net investment amount. Therefore, the security's price is often higher during the Cum Dividend period compared to the ex-dividend period.

After the ex-dividend date, the security's price typically drops by about the dividend amount. This is because the upcoming dividend is no longer included in the purchase, and buyers will have to wait until the next dividend announcement to potentially receive a dividend. Therefore, the ex-dividend date often triggers selling activity, leading to increased trading volume.

Strategic Considerations for Traders

Traders can use the Cum Dividend status to their advantage by incorporating it into their trading strategies. For instance, dividend stripping is a strategy where traders buy a security just before the ex-dividend date during the Cum Dividend period and sell it after the ex-dividend date. The aim is to earn a short-term profit from the price difference and the dividend received.

However, it's important to note that this strategy carries risks. The security's price may not drop by the exact dividend amount after the ex-dividend date, and other market factors can also influence the security's price. Therefore, traders should carefully consider these factors and their own risk tolerance before implementing such strategies.

Conclusion

The Cum Dividend concept is a fundamental aspect of trading that directly impacts the decision-making process of traders and investors. By understanding this concept, traders can make more informed decisions about when to buy or sell a security, how a security is priced, and how to strategize their trades.

While the Cum Dividend status can provide opportunities for profit, it also carries risks. Therefore, a thorough understanding of this concept, along with careful consideration of market conditions and personal risk tolerance, is crucial for successful trading.

Start Trading with Dividends in Mind at TIOmarkets

Now that you're equipped with the knowledge of the Cum Dividend concept, take the next step in your trading journey with TIOmarkets. As a top rated forex broker, we offer a robust online trading platform where you can trade over 300 instruments across Forex, indices, stocks, commodities, and futures markets. With low fees and a global presence in over 170 countries, TIOmarkets is the ideal place to apply your understanding of dividends to real-world trading. Enhance your skills further with our comprehensive suite of educational resources and step-by-step guides. Ready to dive into the markets with confidence? Create a Trading Account today and join our community of 170,000+ traders!

Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional client’s losses can exceed their deposit. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.

Join us on social media

image-959fe1934afa64985bb67e820d8fc8930405af25-800x800-png

TIO Staff

Behind every blog post lies the combined experience of the people working at TIOmarkets. We are a team of dedicated industry professionals and financial markets enthusiasts committed to providing you with trading education and financial markets commentary. Our goal is to help empower you with the knowledge you need to trade in the markets effectively.