Comment on Reverse Arbitrage? SLB?

arcus commented on 30 Jun 2013, 05:34 AM

“SBI had announced a dividend of Rs 35/share. The stock goes ex-dividend on 24th of May. In stock markets, usually when a dividend is announced, the stock price goes up by the dividend amount on the record date and it reduces by the same amount on the ex-dividend date. So what it means is if SBI was at 2350 and the dividend of Rs 35 was announced, on the record date the stock will go to 2385. On the ex-dividend day, since the dividend is already paid, the stock price comes down by the same amount, in this case it will automatically come down by Rs 35 on 24th May.”

That is only true if the market sentiment is extremely positive or the dividend payed out was more than what the market was expecting and hence the market reacted positively.

However, what usually happens is that if SBI is trading at 2350 before ex-dividend, then SBI will simply fall to 2315 on the ex-dividend day. Its not true that it will rise to 2385 from 2350 and then again fall to square one i.e. 2350. That would imply that the dividend was payed out of thin air without any affect on the equity.

Whenever a dividend is payed the stock price falls by an equal amount in an efficient market because a reduction in assets (cash payed out) reduces equity (stock price).

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