Record date effect has a negative impact on stock price falling. Stock price begins to fall immediately after the record date because of investors’ psychological effect.
They think that dividend has reduced the actual price of a stock. Hence, intrinsic value of a dividend paying stock has to lose more market value than dividend return.
There is no mentionable reason behind this price downtrend. Because, traders and investors will buy this stock at high price after some days later. This downtrend price movement is defined as record date effect.
Understanding record date effect
- Record date effect always reduces stock price more than actual dividend an investor will get.
2. There is no significant reason behind this price fall.
3. If a trader falls in record date effect, he may lose his trading capital. Because all the companies don’t provide handsome dividend.
4. Many traders don’t feel encourage to hold stock on ex-dividend date because of excessive price falls after record date.
5. In many cases, price fall kills all the dividend an investor is going to receive.
6. But, this price fall will not continue for long time. Falling price will recover after some days.
7. Traders can benefit from this effect as they can get better opportunity from price correction process.
What is the impact of record date effect?
In this above chart, record date of this stock was on 24.10.2021. Hence, ex-dividend date was 23.10.21. On 21.10.2021, per share price was at 46.50.
But this per share price touched at 41.50 on 25.10.2021. That means this stock has lost nearly 10% price day after record date.
Remember that this stock market has circuit breaker. For circuit breaker, a stock can increase or decrease up to 10% in a trading day.
If this trend will continue, this stock may lose 20% to 40% of market value. This stock declared 35% cash dividend and it is a strong fundamental company.
Why record date effect matter?
For a trader, record date is very important issue. If a trader buy stock at high price before the record day, he has to lose money.
Think about the dividend yield for above discussed stock. Dividend yield is (3.5/46.5)*100=7.61%.
A trader has to wait nearly one month for getting dividend in his account. In a single day, he has lost 10%. But if he can sell near his buying price, he can get a significant return from this stock by holding just 2 or 3 days.
Excessive sell pressure happens after the record date because traders want to earn 7% to 10% return by holding 2 or 3 days.
On the contrary, 7.61% dividend is mentionable amount for investors. Investors don’t care about short time price fluctuation of market. Since investors hold shares for long time, they don’t need to sell at cheap rate.
What is the effect on traders?
Record date effect brings a better opportunity for traders. They can buy stock at cheap rate. As traders think about short term gain, they will buy this stock when uptrend starts.
This excessive price fall makes price adjustment. so, traders have little risk for buying overvalued stock. Just they need to wait for final game.
How a trader can avoid the effect ?
In order to avoid record date effect trap, a trader needs to analysis RSI indicator and candlestick chart. Relative strength Index (RSI) indicates buy and sale signal.
After excessive sale pressure, stock price will reverse and traders can get chance to trade trend reverse.
On the other hand, candlestick pattern will show the uptrend and downtrend price movement. Even, a trader can make trading mistakes. Then he can use stop loss rule to minimize loss.
Conclusion
Since record date effect is responsible for price falling, a trader has to trade with more care. Ex-dividend date is very important to think about next impact of record date.
Any mistake may destroy trading account. Many market has no circuit breaker. Hence, how much trading capital will lose for this impact cannot be predicted.
Founder of The Financial Ask
