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Community Manager
Posts: 281
Registered: ‎08-04-2016

Index Dividend Adjustments - How do they work?

Hello all,

 

I just wanted to clarify what happens when dividends reduce the value of an index, and how we adjust our cash prices following this, as I know many of our clients trade during these periods and are affected!

 

As you know, constituent stocks of an index will periodically pay dividends to shareholders, and when they do, this impacts the overall value of the index, causing it to drop by a certain amount.  Each week, we receive the forecast for the number of points any indices are due to drop by, and we publish this for you.  As dividends are scheduled, public events, it is important to remember that leveraged index traders can neither profit nor lose from such price movements.

 

If you think about it, if index dividend adjustments were legitimate market movements, everyone with any sense would place a large short position just before the adjustment, and close out just after, locking in the drop in the value!  This is not the case.

 

If you have an open position through a dividend adjustment, you will, however, be affected by the drop in index value.  To counteract this, and to ensure there is no material effect to you, we will either credit or debit your ledger with the exact amount you have incurred as additional running loss/profit.

 

Example 1:

You are long £10/point of the FTSE DFB at 4:30pm when there is a dividend adjustment of 7.8 points.  Our FTSE DFB price drops by 7.8 points, so your running P&L is reduced by 7.8 x £10 = £78.  We therefore credit your ledger with £78, to negate this drop in P&L.

 

Example 2:

You are short 2 standard lots of Wall Street Cash at 9pm when there is a dividend adjustment of 2.9 points.  Our Wall Street Cash price drops by 2.9 points, so your running P&L is increased by 2.9 x 2 x $10 = $58.  We therefore debit your ledger with $58, to negate this rise in P&L.

 

Hope this makes sense, but please do pass on any questions!  Also check our explanatory video here for more information.

 

Thanks,

Hannah

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Occasional Contributor
Posts: 19
Registered: ‎04-09-2016

Re: Index Dividend Adjustments - How do they work?

Hi, can you supply a longer range forecast? . I think this would help investors a great deal so as to be able to plan for the larger dividend weeks that notwithstanding outside surprise news keeps upward pressure on the ftse.
Thank you Hannah in aticipation of your reply.
Community Manager
Posts: 281
Registered: ‎08-04-2016

Re: Index Dividend Adjustments - How do they work?

Hi @Milloony, thanks for the post.

 

Our Corporate Actions team prepare the adjustment forecast only a week ahead as the figures can be increasingly subject to change the further forward you look.  I understand it may be useful to have, however we don't particularly want to publish figures likely to change and therefore need editing, hence the 1-week plan.

 

Apologies for any restriction - and please do call the helpdesk should you wish to try and obtain a more future forecast!

 

Thanks,

Hannah

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