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Frequently Asked Questions (FAQs) on Stocks
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A stock I own just went ex-dividend, what is that mean?
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Wouldn't it be profitable to buy a stock when a dividend is
declared and sell it the day the stock goes ex?
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What is it mean to sell the stock
short?
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What is convertible stock?
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Who should buy convertible stock?
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A stock I own just went ex-dividend, what is that mean?
Ex-dividend doesn't mean extra dividend. If you've owned the stock
during the period the dividend was declared and five days prior to
the ex-dividend date, then you are entitled to payment of the
dividend. The fifth day prior to the ex date is called the record
date. Any name listed on the record date as an owner of the stock is
entitled to that dividend. If you purchase the stock during the five
days between the record date and ex date, you don't receive the
dividend. Ex-dividend merely means without dividend.
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Wouldn't it be profitable to buy a stock when a dividend is declared
and sell it the day the stock goes ex?
Sounds great but this idea just doesn't work. On the day a stock goes
ex, the price is readjusted to account for the dividend. So you'd end
up even, no gain at all, just transaction charges. Here's an example:
Stock X declares a dividend of a dollar per share. You rush out and
buy the stock at $30 a share. You hold stock until the dividend is
paid. On the day the stock goes ex, the opening price of the stock is
no longer $30. It opens at $29, automatically readjusted to reflect
that $1 dividend. You end up exactly where you started.
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What is it mean to sell the stock short?
Shorting stock is not for the faint of heart. When you short stock,
you sell stock that you don't own. The technique is used most often
to take advantage of an anticipated decline in the price of a stock.
You borrow the stock from your brokerage firm and deliver it to the
buyer. For this you are paid the current market rate at the time of
the sale. Now you have the cash in your account. You're betting that
the price of the stock will go down. If the price does decline, you
then buy the same number of shares that originally sold and return
them to the brokerage firm, which expects the borrowed shares to be
replaced. There is no time period for shorting stock. If the price
drops significantly the next day, you may purchase shares for
delivery to the firm.
Here is an example of selling short and what can happen. The stock is trading at $100
currently and you think it will trade much lower in the coming months. You
decide to take the plunge and short 100 shares.
One of two things can happen in the coming months:
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The Stock
Price Sinks
(stock goes to $40)
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Borrowed 100 shares of XYZ at $100 |
$10,000
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| Bought Back
100 shares of XYZ at $40 |
-$4,000
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| Your Profit |
$6,000
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The Stock
Price Rises
(stock goes to $120)
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Borrowed 100 shares of XYZ at $100 |
$10,000
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| Bought Back
100 shares of XYZ at $120 |
-$12,000
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Your Loss |
-$2,000
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Clearly, short selling can be profitable. But just as with
buying long, there is no guarantee that the price of a stock will go the way you
want and there are many risks involve in shorting. Read more about
selling short........
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What is convertible stock?
Convertible stock is a preferred stock that pays a fixed dividend or
rate of interest and can be converted into common stock at a
specified price or conversion ratio. It typically trades in 10-share
lots and has a par value ranging from $10 to $100.
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Who should buy convertible stock?
You might consider buying convertible stock if you are looking for
conservative income with a potential for growth. With convertible
stock, you can capitalize on the growth of the underlying common
stock shares by converting or you can sit tight on the income that is
produced and not convert. It's like having your cake and eating it,
too. Convertible stock allows you to play both sides of the fence.
However, be aware that for a strict income investment, its dividend
is usually less than a straight preferred stock.
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