1.2 Dividends & Stock Splits
Corporations reward equity holders via cash and stock dividends. Understanding the 4 dividend dates (DERP) and calculating adjusted cost basis after forward and reverse stock splits is heavily tested on the Series 7.
Key FINRA Exam Takeaways
- Dividend order: Declaration Date -> Ex-Dividend Date -> Record Date -> Payable Date (DERP).
- Under T+1 settlement, the Ex-Dividend Date is exactly 1 business day before the Record Date.
- Stock price drops by the dividend amount on the morning of the Ex-Dividend Date.
- Stock splits change share count and price inversely, leaving total market capitalization unchanged.
- Stock dividends and splits are NOT taxable events upon receipt; cost basis per share is adjusted.
The DERP Sequence and T+1 Rule
Declaration Date (set by Board) -> Ex-Dividend Date (set by FINRA/exchanges, 1 business day prior to record date) -> Record Date (set by Board) -> Payable Date (set by Board). To receive the dividend, an investor must purchase the stock BEFORE the ex-dividend date.
Forward vs. Reverse Stock Splits
In a 3-for-2 forward split, an investor with 100 shares at $60 ends up with 150 shares (100 × 3/2) at $40 ($60 × 2/3). In a 1-for-5 reverse split, 100 shares at $2 become 20 shares (100 × 1/5) at $10 ($2 × 5/1). Total position value remains constant.
3-for-2 Stock Split Basis Adjustment
An investor owns 200 shares of XYZ common stock purchased at $45 per share ($9,000 total). The board declares a 3-for-2 stock split.
- Step 1: Calculate new share count = 200 × (3 / 2) = 300 shares.
- Step 2: Calculate new adjusted cost basis per share = $45 × (2 / 3) = $30.00 per share.
- Step 3: Verify total position value = 300 shares × $30.00 = $9,000 (unchanged).
The board of directors of Apex Corp declares a $0.50 cash dividend with a record date of Thursday, October 15. Under T+1 settlement, on which date does the stock begin trading ex-dividend?