A record date is the date on which a company identifies the shareholders to whom it will pay an upcoming dividend. Owners of the stock as of the date of record will receive the dividend. Once the date has arrived, the price of the stock will generally drop by the amount of the dividend. This is known as "trading ex-dividend." The reason that a stock trades ex-dividend is because, if shares are sold after the record date, the seller, who was the shareholder on the record date, receives the dividend.
The ex-dividend date is the first day of the ex-dividend period. The ex-dividend period is the period of time from the record date until the date that the dividend is actually paid. A stock trades ex-dividend for the entire ex-dividend period.
On 1 August, a company might declare a dividend to be paid on 1 September to shareholders of record on 15 August. In this case, the record date is 15 August. All shareholders of record on 15 August will receive the dividend. The stock will trade ex-dividend from 16 August to 1 September.
With respect to mutual funds, the record date is used to determine each owner, and the number of shares he or she owns on a given date, in order to pay distributions to shareholders. Mutual fund distributions are typically paid annually or semiannually, even though the securities in the funds will pay dividends at various times throughout the year. Shareholders of record on the date of record will receive the distribution on the distribution date.
The record date of asset-backed securities is the date on which owners are identified so that a scheduled payment can be distributed. Owners as of this date will receive the payment on the payment date. Asset-backed securities are debt instruments that are backed by specific assets, such as accounts receivable or installment contracts. As the accounts are collected or installment payments are made, payments are distributed to the owners of the securities in accordance with the terms of the security.
Whenever securities are bought or sold, there is a settlement period before the transaction is recorded. A stock or municipal bond trade settles three stock trading days after the sale. US Government bonds and mutual funds typically settle the day after the trade date. This is important to keep in mind, as the trade needs to be settled prior to the record date for the buyer to receive the dividend or distribution.
