DEFINITION of ‘Record Date’
The record date is the cut-off date established by a company in order to determine which shareholders are eligible to receive a dividend or distribution. The determination of a record date is required to ascertain who the company’s shareholders are as of that date, since the shareholders of an actively traded stock are continually changing. The shareholders of record as of the record date will be entitled to receive the dividend or distribution declared by the company. Also known as the date of record.
BREAKING DOWN ‘Record Date’
The record date is important because of its relation to another key date, the ex-dividend date. On and after the ex-dividend date, a buyer of the stock will not receive the dividend as the seller is entitled to it.
The ex-dividend date is set exactly two business days before the dividend record date. This is because of the T+3 system of settlement presently used in North America, whereby stock trades settle three business days after the transaction is carried out. Thus, if an investor buys a stock two business days before its record date, his or her trade would only settle the day after the record date. He or she would therefore not be a shareholder of record for receiving the dividend.
Consider an example. Assume company Alpha has declared a dividend of $1 payable on May 1, 2015 to shareholders of record as of April 10, 2015. The record date is therefore April 10, 2015 and the ex-dividend date is two business days before the record date, or April 8, 2015.
If Sam wishes to receive the dividend of $1 per Alpha share, she should buy the stock before its ex-dividend date. If she buys Alpha shares on April 7, her trade will settle on April 10; since she is a shareholder of record as of April 10, she will receive the dividend. But if she waits for a day and buys Alpha shares on April 8, which is the ex-dividend date, her trade will only settle on April 13 (as April 11 and April 12 are Saturday and Sunday respectively, three business days after April 8 is April 13). She would not receive the dividend in this case as she was not a shareholder of Alpha as of the April 10 record date.
Significance of the Record Date
In the world of finance and investing, financial advisors and professional traders parse every significant bit of data to on hot stocks, mutual funds, ETFs? and more, to ensure that an investment brings favourable returns. A company’s record date is one such component of the complex stock market that must be understood clearly in order to invest successfully.
Because companies are constantly being traded, with shares being bought and sold daily, the shareholders of a company also change continuously. As such, deciding on who receives a dividend payment can be difficult without designated dates of purchase in order to qualify for the dividend. The exact definition of a record date may vary slightly between countries, such as between the London Stock Exchange (LSE) and The New York Stock Exchange (NYSE).
The U.S. Securities and Exchange Commission (SEC) states that in order to receive a dividend payment, most often in the form of cash or shares, a shareholder must be on the company’s list of shareholders by the set record date. In order to so, the company’s shares must be bought before the ex-dividend date. The ex-dividend date is set for stocks two business days before the record date. It is also important to account for the U.S. T+3 system for the settlement of stocks, which stipulates that it takes three business days to fully process a transaction.
Record Date in Context
The most famous stories of astronomical successes and equally extreme downfalls in the stock market each have one aspect in common – timing. Jesse Livermore amassed a fortune of $100 million in 1929 by successfully foreseeing and shorting the October 1929 market crash. However, 10 years later he had lost his fortune. In 1992 George Soros, chairperson of one of the most successful hedge funds in history, infamously sold short $10 billion worth of British pounds only to make $1 billion after correctly timing the sale around Black Wednesday. Soros was nicknamed “the man who broke the Bank of England.” The extensive knowledge needed in order to take advantage of timing in the stock market starts with the most basic rules, such as record dates and ex-dividend dates, through to the most complex aspects of market understanding.