What is a dividend adjustment and when should it be taken into account?
You can earn money on company shares not only in the traditional way, but also using contracts for difference (CFDs).
At the same time, CFDs provide the opportunity to open both buy and sell transactions, allowing you to earn not only on rising prices, but also on falling ones.
Dividends are accrued on purchase transactions, just as they would be with physical ownership of shares, but on sale transactions, an adjustment is made for the amount of accrued dividends.
That is, when you have an open trade on shares of a company that has paid dividends, this amount is debited from your deposit in the trading platform and sent to those traders who have opened buy trades on similar shares.
If you short stocks using high leverage, dividend payouts can significantly impact your deposit amount.
For example, you opened a short position on a company's shares worth $25,000, with a $1,000 deposit and a leverage of 1:25. Afterwards, dividends of 2% are deducted, resulting in a deduction of $25,000 x 2/100% = $500 from your deposit. This means you lose half your initial deposit, which could lead to the trade being closed outright due to a stop-out.
After such calculations, the desire to open short trades on shares completely disappears, in order to avoid losing the deposit.
What can be done to reduce the risk of dividend adjustments?
For short trades, choose stocks of companies that do not pay dividends. Examples of such companies include Amazon, Alphabet, Meta Platforms, Tesla, Berkshire Hathaway, Netflix, Adobe, Salesforce, NVIDIA, Square (Block)
Before opening trades, check the dividend accrual calendar, which indicates which securities will be paid dividends this week - the dividend adjustment calendar .
Avoid using high leverage for short trades. Brokers typically limit leverage on stocks to 1:10, but it's best to open short positions with leverage no more than 1:5.
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