Upcoming Indices Dividend Drop Points

A dividend is a distribution of a portion of a company's earnings to shareholders. Dividends are normally issued as cash payments if you own the underlying share.

The ex-dividend date determines when trading in the underlying stock no longer includes an entitlement to the upcoming dividend payment and therefore on the ex-dividend date the value of the underlying share will decrease by the approximate dividend value. Anyone already holding a position in the underlying stock prior to and going into the ex-dividend date will be entitled to receive, or required to pay, the dividend dependent on whether they are long or short. Anyone opening a position on the ex-dividend date will not be entitled to, or required to pay, the dividend.

As a holder of a CFD or spread bet position you do not hold the underlying stock, but you will still be impacted by the underlying dividend payments and the subsequent decrease of the share price. CMC Markets will therefore replicate the dividend payment in the form of a cash adjustment to negate the financial impact of the dividend on the underlying share price.

For example: if you were long (holding a buy position), you would have been disadvantaged by the drop in the market price caused by the pay out of the dividend, but you would be entitled to receive the dividend if you were holding the underlying stock, therefore we would credit your account with the equivalent dividend amount. If you were short, you would benefit from the drop in the price, but would be required to pay out the dividend if you were holding the underlying stock, therefore we would debit your account with the equivalent dividend amount.

We will also adjust your guaranteed stop-loss level by the same amount of points as the dividend adjustment (maintaining the same level of risk), however, regular stop-loss, take profit and pending orders will not be amended by us.

Let's say you hold a long position of 3,000 Vodafone (LON:VOD) share CFDs and Vodafone announces a 15p dividend. In this case, £450 would be credited to your CFD account.

15p x 3,000 = £450*

Note: if you held a short position going into the ex-dividend date then your account would be debited £450.

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The dividend will appear as a 'Price Adjustment' in your account history within the platform.

*Withholding tax
Dividend adjustments on long positions are credited to your account, less any applicable withholding taxes. Withholding tax is a levy deducted from dividends in most underlying markets. The deduction varies depending on the underlying market, but it's often reduced to 15% where a treaty between the UK and the relevant market exists. The withholding tax deduction doesn't apply to short positions.

An index typically reflects the weighted average share price of several underlying stocks trading on the same exchange, therefore if one of these stocks declares a dividend payment then the underlying share price will decrease by the dividend value and the index will also decrease by the equivalent weighted average value of the same dividend on the ex-dividend date.

For example: an index consists of a number of stocks including Vodafone who have announced a dividend of 15p, Vodafone is currently priced at 156p and represents 2% of the total value of the underlying index, if the index is priced at 7000 points then the 2% equates to 140 points of the index, the dividend of 15p represents a 9.6% drop in the value of the underlying share price (from 156p to 141p), therefore the equivalent dividend deduction on the index will be 13.44 points.

140 x 9.6% = 13.44 points

If you are holding a long or short position of 30 units of the index then you will be credit or debited £40.32.

30 x 13.44 = 40.32

Withholding tax will not be applied to index adjustment representing listed exchanges but may be applied to Custom Index adjustments (indices that are derived by CMC Markets and are not listed on any exchanges).

Note: There are no price adjustments on forward indices, or our Germany 30 and Norway 25 cash indices.

Dividend adjustments on long positions are credited to your account, less any applicable withholding taxes. Withholding tax is a levy deducted from dividends in most underlying markets. The deduction varies depending on the underlying market, but it's often reduced to 15% where a treaty between the UK and the relevant market exists. The withholding tax deduction doesn't apply to short positions.

"DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.

No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. "

Written By: CMC Markets