Final answer:
The ex-dividend date, set by FINRA rules, is one business day before the company's record date for dividend payments, marking the cutoff for eligibility to receive the dividend.
Step-by-step explanation:
The ex-dividend date is a term used in the context of stock trading and is determined by the Financial Industry Regulatory Authority (FINRA) rules. This date is significant for investors and traders because it marks the cutoff point for being entitled to receive the next dividend payment. When a company declares a dividend, it sets a record date, and FINRA's rules stipulate that the ex-dividend date is set one business day before the record date.
Therefore, investors who purchase the stock on or after the ex-dividend date are not eligible to receive the declared dividend. In contrast, those who own the stock before the ex-dividend date are eligible.
For example, if a company declares a dividend payment with a record date on a Tuesday, the ex-dividend date would be set for the preceding Monday. This mechanism ensures that the settlement of the trade, typically taking two business days (T+2 settlement), occurs before the record date.