In this article, we will discuss
- How Are Stock Market Indices Related to Share Prices?
- How Do Dividends Affect Share Price?
- How Do Dividends Impact Stock Market Indices?
It is a common practice among investors to consult stock market indices before making an investment. This helps them assess market conditions and make informed decisions.
However, these benchmarks are unable to provide reliable data during times of short-term price volatility. There are several circumstances which can lead to such a situation, including the time when companies issue dividends. Keep reading to learn how dividend payouts can impact stock market indices.
How Are Stock Market Indices Related to Share Prices?
A stock market index is a benchmark that helps determine the performance of a particular sector or the market as a whole. It traces the performance and price movements of stocks on a particular exchange and selects them based on some specific criteria like market capitalisation, industrial sector, etc.
An excellent example in this regard is BSE Sensex, which consists of the top 30 companies listed on the Bombay Stock Exchange. Additionally, there is NIFTY 50, which tracks the National Stock Exchange’s top 50 stocks.
Thus, major short-term changes in stock prices can impact the performance of stock market indices.
Now that you know how share prices affect the performance of indices, it’s time we understand the dividend angle.
How Do Dividends Affect Share Price?
Companies usually declare their quarterly dividend amount and its payment date before it is credited to shareholders. It also announces an ex-dividend date, before which individuals can purchase its stocks in order to become the company’s shareholders and avail dividend payout.
This date is usually fixed one business day before the record date on which the organisation reviews its shareholders list. Now, investors consider dividend declarations as a positive indication of a business’s performance. They also like investing in dividend stocks, which provide consistent payouts, as they serve as an excellent source of passive income.
Thus, in order to receive the dividend, investors start buying the stock even if they have to purchase it at a higher price. As the ex-dividend date approaches, the stock price tends to increase by an amount which is equal to the dividend payout. However, it may not always be the case as the actual price change also depends on market activity.
When the ex-dividend date arrives, new investors who are not eligible to receive the dividend will not be interested in buying this stock. As a result, it will drive prices down by an amount which is equal to the amount of dividend payable.
But, if the stock price increase is more than the actual dividend amount, the price drop after the ex-dividend date may be minimal. Moreover, if the dividend amount is small, the price reduction can even go unnoticed. This will result in a net increase in stock price.
How Do Dividends Impact Stock Market Indices?
Now, as the performance of stock market indices depends upon the stocks they track, any change in their prices will reflect in the former. So, when you are analysing an index to assess market conditions, consider checking its stocks and whether they have an upcoming dividend payout.
If yes, you can get an idea of how prices may change and make a decision accordingly.
In a nutshell, dividends can have a substantial impact on stock market indices depending on the market activity. Thus, it is essential for you to keep tabs on the latest stock market news and make your investments depending upon them.
However, keeping track of your target assets along with the market can be a hectic task. In this regard, the New-Gen Samco app is all you need. It provides users with personalised market insights straight from its team of experts, helping you make the most profitable choices.
Samco also allows you to create a personal index, enabling you to track your returns over a particular time period. Furthermore, you can monitor your net worth movement in real time and compare your performance with that of your peers.
So, what are you waiting for?
Frequently Asked Questions
What are the best dividend stocks in 2023?
Ans. The best dividend stocks in 2023 are Jio Financial, Vedanta, TV TodayNetwork, Hind Zinc and Narmada Gelatin.
What is dividend yield?
Ans. Dividend yield indicates the amount of money a company pays to its shareholders with respect to its share price. It is expressed in the form of a percentage. You can calculate it by using the formula - Dividend Yield = (Annual dividend/Stock price) x 100.
How can I choose the best dividend stocks?
Ans. You can choose the best dividend stocks by looking for companies with strong financials, low debt-to-equity ratios, consistent dividend-paying track record and superb long-term growth prospects.
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