What is the Record Date?

While flourishing capital gains can seem like the most attractive feature of investing in stocks, shareholders are entitled to more. As part owners of the company, they receive a portion of the company’s profits in the form of dividends. The distribution of these dividends is also decided on predetermined dates.

What is a record date?

The record date is the date set forth by the company that determines which shareholders are eligible to receive the company’s dividends. It is also known as the cut-off date. The record date ascertains which investors can be deemed as the shareholders of the company. This is because shares are actively traded in the stock market, constantly changing ownership from one investor to another.

The record date is decided by the board of directors of the company. The board also decides which shareholders receive stock reports and other financial information related to the shares.

Investors who are named in the company’s shareholder record on the record date are entitled to earn dividends or any other incomes that the company may want to distribute, such as bonus shares, stock splits, etc. Thus, the investors who purchase shares post the record date are not eligible for that specific dividend distribution.

Significance of Record Date

The record date is essential because of its significance to other related dates required for dividend distribution, such as the ex-dividend date. The ex-dividend date marks the day by which investors need to purchase a stock if they want to receive dividends. This date is determined according to the rules set by the exchange. While the ex-dividend date occurs before the record date, the board of directors chooses the record date first.

After the ex-dividend date, a buyer of a stock cannot receive dividends. The ex-dividend date is always set precisely one business day before the record date. This rule is followed because of the T+2 method of trade settlement used in North America. In scenarios like this, if an investor decides to buy a share one business day before its record date, the trade would only settle after the record date, resulting in no dividend for the investor. The rule may be altered if the value of the dividend exceeds 25% of the total share’s value. However, that is a rare occurrence.

Here, the ex-dividend becomes much more significant to buying or selling stocks because the record date is only an official date for the management of the company to receive the list of the shareholders who are entitled to the latest announced dividend.

Example of Record Date

Suppose a company has announced the distribution of dividends payable on July 1. The record date is set to be 10th June, and the ex-dividend date is 9th June. If an investor wants to be eligible to receive dividends, they must purchase the company’s stock before 9th June.

Let’s say you purchased a share on 8th June, your trade will be settled on 10th June, on the record date, making you qualified to receive the announced dividends. However, if you purchased a share on June 9 (after the ex-dividend date), your trade will be settled on June 11, post the record date, deeming you ineligible to receive any dividend benefits from the company.

This is why investors need to pay attention to the record dates and ex-dividend dates announced by the company before investing.