Comments on: Special Dividends

By: Finance Guide 101

Finance Guide 101 — Wed, 30 Nov -0001 00:00:00 +0000

Finance Guide 101, 2/5/2007
http://www.financeguide101.com/stocks/

Hello Asif,

I have subscribed to your SINLetter. I know this subscription will give me more info about market.

By: Geoffrey Alleyne

Geoffrey Alleyne — Wed, 30 Nov -0001 00:00:00 +0000

Looking forward to intersting articles

By: retireyoung

retireyoung — Wed, 30 Nov -0001 00:00:00 +0000

I have long been interested in the huge potential of making short term gains thru the purchase of stock in companies who have recently announced special dividend payments.

The strategy as originally devised would have been to make the stock purchase on or right before the ex-dividend date and then sell the following day thereby locking in the dividend but taking out the market risk of price fluctuations.

After some initial research I now understand that the market itself seems to correct for this. If the special dividend is a payout of 3% then the stock price seems to drop by a corresponding amount (therefore wiping out any easy money gain).

But that brings me to this question/observation: If the stock price will always (or almost always) go down after the ex-dividend date, why not short the stock on the ex-div date and then buy it back at the open of the market the next day thereby locking in that gain?

By: Asif

Asif — Wed, 30 Nov -0001 00:00:00 +0000

If you short a stock, you are responsible for paying all dividends paid by the company during the period of time you hold the short position. Hence this strategy would not work.

If you consider put options as an alternative to get around this rule, you will find out that the price of the put options will reflect the upcoming special or regular dividend.

Markets are generally pretty efficient at pricing these kinds of events and inefficiencies are often driven by fear, greed or misunderstanding.

I guess you will have to work just a little longer before you retire.