Do stock prices drop due to dividends?
Yes, the stock price drops on the ex-dividend date by roughly the amount of the dividend. There is even academic research testing this and confirming that the popular rule of thumb works well. The Paragraph talks about dividends given by Mutual Funds. Say a fund has NAV of $ 10, as the value of the underlying security grows, the value of the fund would also grow, lets say it becomes $ 12 in 2 months. Now if the Mutual Fund decides to pay out a dividend of $ 1 to all unit holder, then post the distribution of dividend, the value of the Fund would become to $ 11. Thus if you are say investing on 1-April and know that dividends of $1 would be paid on 5-April [the divided distribution date is published typically weeks in advance], if you are hoping to make $1 in 5 days, that is not going to happen. On 6-April you would get $1, but the value of the fund would now be $11 from the earlier $12. This may not be wise as in some countries you would ending up paying tax on $1. Even in shares, the concept is similar, however the price may get corrected immediately and one may not actually see it going down by $1 due to market dynamics. Yes, the stock price drops on official listing. But what gonna happen on first trade after the dividend date, is up to the market. The market is the market, the rules are the rules. I saw prices going up more than once just after the dividend date, exactly because people think will be cheaper. Market doesn't always follow rules. "In the case of mutual funds, Net Asset Value (NAV) is the price used to buy and sell shares. NAV is just the value of the underlying assets (which are in turn valued by their underlying holdings and future earnings). So if a fund hands out a billion dollars, it stands to reason their NAV*shares (market cap?) is a billion dollars less. Shareholder's net worth is equal in either scenario, but after the dividend is paid they are more liquid. For people who need investment income to live on, dividends are a cheap way to hold stocks and get regular payments, versus having to sell part of your portfolio every month.  But for people who want to hold their investment in the market for a long long time, dividends only increase the rate at which you have to buy. For mutual funds this isn't a problem: you buy the funds and tell them to reinvest for free. So because of that, it's a prohibited practice to ""sell"" dividends to clients." Share prices fall when dividends are paid out because the paid dividend (cash out) actually reduces the value of the company. Usually the share price falls by the amount of the dividend payment. I would say that the answer is yes.  Investors may move on purchasing a stock as a result of news that a stock is set to pay out their dividend.   It would be interesting to analyze the trend based on a company's dividend payouts over 10 or so years to see what/how this impacts the market value of a given company.
"4) Finally, do all companies reduce their stock price when they pay a dividend? Are they required to? There seems to be confusion behind this question.  A company does not set the price for their stock, so they can't ""reduce"" it either.  In fact, nobody sets ""the price"" for a stock. The price you see reported is simply the last price that the stock was traded at.  That trade was just one particular trade in a whole sequence of trades.  The price used for the trade is simply the price which the particular buyer and particular seller agreed to for that particular trade.  (No agreement, well then, no trade.)  There's no authority for the price other than the collection of all buyers and sellers. So what happens when Nokia declares a 55 cent dividend?  When they declare there is to be a dividend, they state the record date, which is the date which determines who will get the dividend: the owners of the shares on that date are the people who get the dividend payment.  The stock exchanges need to account for the payment so that investors know who gets it and who doesn't, so they set the ex dividend date, which is the date on which trades of the stock will first trade without the right to receive the dividend payment.  (Ex-dividend is usually about 2 days before record date.)  These dates are established well before they occur so all market participants can know exactly when this change in value will occur. When trading on ex dividend day begins, there is no authority to set a ""different"" price than the previous day's closing price.  What happens is that all (knowledgeable) market participants know that today Nokia is trading without the payment 55 cents that buyers the previous day get.  So what do they do?  They take that into consideration when they make an offer to buy stock, and probably end up offering a price that is about 55 cents less than they would have otherwise.  Similarly, sellers know they will be getting that 55 cents, so when they choose a price to offer their stock at, it will likely be about that much less than they would have asked for otherwise." Indices such as SP500 are typically including dividends - the payment of dividends doesn't impact the value of the index. Where can I find data on these dividends?  I found data on dividend yields, but these give me access only to the sum of dividends over the last year. This in turn can change either because there are new dividends being paid, or because you stop counting last year's dividends... The answer, for me, has to do with compounding. That drop in price post-ex-div is not compounded. But if you reinvest your dividends back into the stock then you buy on those post-ex-div dips in price and your money is compounded because those shares you just bought will, themselves, yeald dividends next quarter.  Also, with my broker, I reinvest the dividend incurring no commission. My broker has a feature to reinvest dividends automatically and he charges no commission on those buys. Edit:I forgot to mention that you do not incurr the loss from a drop in price until you sell the security. If you do not sell post-ex-div then you have no loss. As long as the dividend remains the same (or increases) then the theoretical ROI on that security goes up. The drop in price is actually to your benefit because you are able to acquire more shares with the money you just received in the dividend  So the price coming down post-ex-div is a good thing (if you buy and hold). Various types of corporate actions will precipitate a price adjustment.  In the case of dividends, the cash that will be paid out as a dividend to share holders forms part of a company's equity.  Once the company pays a dividend, that cash is no longer part of the company's equity and the share price is adjusted accordingly. For example, if Apple is trading at $101 per share at the close of business on the day prior to going ex-dividend, and a dividend of $1 per share has been declared, then the closing price will be adjusted by $1 to give a closing quote of $100. Although the dividend is not paid out until the dividend pay date, the share price is adjusted at the close of business on the day prior to the ex-dividend date since any new purchases on or after the ex-dividend date are not entitled to receive the dividend distribution, so in effect new purchases are buying on the basis of a reduced equity.   It will be the exchange providing the quote that performs the price adjustment, not Google or Yahoo.  The exchange will perform the adjustment at the close prior to each ex-dividend date, so when you are looking at historical data you are looking at price data that includes each adjustment. I've never seen a dividend, split or other corporate action during the day, but I have seen trade suspended a few times when something big happened. The market opening price is not in general the same as the close of the previous day. It can gap up or down and does frequently. I don't know of an api to find out if the dividend was cash or stock, but stock dividends are a lot less common. Dividends indicate that a business is making more profit than it can effectively invest into expansion or needs to regulate cash-flow. This generally indicates that the business is well established and has stabilized in a dominant market position. This can be contrasted against businesses that: Dividends are also given preferential tax treatment. Specifically, if I buy a stock and sell it 30 days later, I will be taxed on the capital gains at the regular income rate (typically 25-33%), but the dividends would be taxed at the lower long-term capital gains rate (typically 15%). Ex-Dividend Price Behavior of Common Stocks would be a study from the Federal Reserve Bank of Minneapolis and University of Minnesota if you want a source for some data. Abstract This study examines common stock prices around ex-dividend dates. Such   price data usually contain a mixture of observations - some with and   some without arbitrageurs and/or dividend capturers active. Our theory   predicts such mixing will result in a nonlinear relation between   percentage price drop and dividend yield - not the commonly assumed   linear relation. This prediction and another important prediction of   theory are supported empirically. In a variety of tests, marginal   price drop is not significantly different from the dividend amount.   Thus, over the last several decades, one-for-one marginal price drop   have been an excellent (average) rule of thumb. It may be true for a bond fund.  But it is not true for bond etf.  Bond etf will drop by the same amount when it distribute dividend on ex-dividend date. For all stocks, expected Dividends are a part of the price it is traded for - consider that originally, the whole idea of stocks was to participate in the earnings of the company = get dividends. The day the dividend is paid, that expectation is of course removed, and thereby the stock value reduced by just the amount of dividend paid. You will see that behavior for all stocks, everywhere. The dividend in your example is just uncommonly high relative to the stock price; but that is a company decision - they can decide whatever amount they want as a dividend. In other words, the day before dividend payments, investors value the stock at ~14 $, plus an expected dividend payment of 12 $, which adds to 26 $. The day after the dividend payment, investors still value the stock at ~14 $, plus no more dividend payment = 0 $. Nothing changed really in the valuation. A futures contract is based upon a particular delivery date.  In the case of a stock index futures contract is a cash settled futures contract based upon the stock index value at a particular point in time (i.e. this is when the final settlement is determined). In your example, the S&P 500 (SPX) is a price return index - that is, it is not affected by dividends and therefore dividends are not incorporated into the index value.  Dividends will affect the price of the constituent stocks (not necessarily by the same amount as the dividend) so they do have influence on the stock index value.  Since the dividends are known ahead of time (or at least can be estimated), this has already been factored into the futures price by the market. In terms of the impact of a dividend by AAPL, AAPL is approximaetely 3.6% of the index.  Apple pays out dividends 4 times a year (currently paying out $0.52 dividends).  Assuming the market is otherwise steady and AAPL drops by $0.52 due to the dividend and Apple is priced at around $105, this would result in a drop in the index of 0.0178% or around 0.35 points. Interesting fact:  There are some futures contracts that are based upon Total Return indexes, such as the German DAX and the above logic would need to be reversed. "Part of it was an Oops, but not all of it. There were reports that the sudden   drop was caused by a trader who   mistyped an order to sell a large   block of stock. The drop in that   stock's price was enough to trigger   ""sell"" orders across the market. Source: http://www.msnbc.msn.com/id/36983596/ns/business-stocks_and_economy/" Here in Australia a stock price is usually highest just before a dividend and lowest just after a dividend. If you buy just after the dividend then you missed out until next time. There may be many other reasons why a stock may exhibit yearly, quarterly and monthly cycles. Nobody is going to buy a stock without returns.  However, returns are dividends + capital gains.  So long as there is enough of the latter it doesn't matter if there is none of the former. Consider:  Berkshire Hathaway--Warren Buffet's company.  It has never paid dividends.  It just keeps going up because Warren Buffet makes the money grow.  I would expect the price to crash if it ever paid dividends--that would be an indication that Warren Buffet couldn't find anything good to do with the money and thus an indication that the growth was going to stop. The price of a future with an underlying that pays dividends is  As you can see, since the value of dividends is subtracted from the value of the underlying equity, the future's price is lowered if dividends rise. Compounding that effect with the dividend effect on equity prices, reducing their prices, the future should suffer more. "No.  If the share price drops to $0, it's likely that the company is in bankruptcy. Usually, debt holders (especially holders of senior debt) are paid first, and you're entitled to whatever the bankruptcy proceedings decide to give holders of equity after the debt holders are paid off. More often than not, equity holders probably won't get much. To give an example, corporate bankruptcy usually involves one of two options: liquidation or reorganization. In the US, these are called Chapter 7 and Chapter 11 bankruptcy, respectively. Canada and the United Kingdom also have similar procedures for corporations, although in the UK, reorganization is often referred to as administration. Many countries have similar procedures in place. I'll use the US as an example because it's what I'm most familiar with. In Chapter 7 bankruptcy, the company is liquidated to pay its debts. Investopedia's article about bankruptcy states: During Chapter 7 bankruptcy, investors are considered especially low on the ladder. Usually, the stock of a company undergoing Chapter 7 proceedings is usually worthless, and investors lose the money they invested. If you hold a bond, you might receive a fraction of its face value. What you receive depends on the amount of assets available for distribution and where your investment ranks on the priority list on the first page. In Chapter 11 bankruptcy, the company is turned over to a trustee that guides it through a reorganization. The Investopedia article quotes the SEC to describe what happens to stockholders when this happens: ""During Chapter 11 bankruptcy, bondholders stop receiving interest and principal payments, and stockholders stop receiving dividends. If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds or a combination of stock and bonds. If you are a stockholder, the trustee may ask you to send back your stock in exchange for shares in the reorganized company. The new shares may be fewer in number and worth less. The reorganization plan spells out your rights as an investor and what you can expect to receive, if anything, from the company."" The exact details will depend on the reorganization plan that's worked out, local laws, court agreements, etc.. For example, in the case of General Motor's bankruptcy, stockholders in the company before reorganization were left with worthless shares and were not granted shares in the new company."