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Dividend capture

Buying just before the ex-dividend date and selling shortly after to collect the payment; the price drop usually cancels the gain.

The strategy sounds like free money and is not. The stock is marked down by roughly the dividend on the ex-dividend-date, so the captured cash is offset by an equivalent capital loss. What is left is the residual price drift, minus commissions, spread, and tax.

Tax makes it worse in most jurisdictions. Holding periods for a qualified-dividend are typically 61 days around the ex-date, so a two-day hold is taxed at ordinary income rates while the offsetting loss may be a capital loss.

Example: buy 2,000 shares at $50 and collect $1.00 per share, or $2,000. The stock opens at $49. You sell at $49 for a $2,000 capital loss, pay tax on $2,000 of unqualified income, and are left worse off by the spread and the tax.

Related: ex-dividend-date, ex-dividend-price-adjustment, qualified-dividend, wash-sale-rule

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bid-ask spread in an order bookSell orders stacked above buy orders with a gap between the best of each.SELLERS (asks)50.0690050.051,40050.0460050.011,10050.002,30049.99800spread = 0.03BUYERS (bids)
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.

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