The Rule Of The Stock Exchange Prevents Confusion

Here, then, the rule of the Stock Exchange applies for the purpose of preventing confusion and contention between the buyer and seller upon this point. Rule 91 (which for convenience I divide into two parts) prescribes (a) that government and corporation inscribed or registered securities are to be quoted ex dividend on the day after that on which the books close for the payment of the dividend, and (b) that securities deliverable by deed of transfer . . . [such as English railway debenture stocks and ordinary stocks and shares] are to be quoted as ex dividend on the account day following the date of the closing of the books for the payment of the dividend, or on the account day following the date on which the dividend may have been declared, provided the dividend be made payable to the holders then registered.

The Stock Exchange account day cannot always coincide with the vary ing dates at which companies' books are closed.

The account day on the Stock Exchange is that on which all bargains must be settled, and when accordingly the dividend in question must finally pass to the one side or the other; and since such dates must for general convenience be fixed at stated intervals, they cannot exactly coincide with the varying dates at which companies' books are closed. But it will be observed that the rule arranges as close a connection as is practicable between the time of marking a stock xd. or x in. and the time of the shutting of the books of different companies.

The Practical Working Of The Rule

The working of the process is interesting. If a bond is to be redeemed at par (£100) in a few years' time and its price now stands at 99, the price will obviously rise gradually (assuming it is certain of repayment) as the date of redemption approaches, until it reaches the £100 as its limit of value. In the same way does the price of a stock increase between one payment of dividend or interest and the ensuing one - omitting here the consideration of any effect on value produced by favourable or unfavourable reports about the security. Let the rate of dividend or interest upon a bond be 3 per cent per annum, and let it be payable on the 20th of February and the 20th of August. After the dividend or interest due on the 20th of February had been discharged, assume that the value of the bond was 98 - it being then of course quoted without the attachment of any dividend. Then its price must gradually grow from 98 by reason of the ensuing dividend it is earning, and at the middle date, or the 20th of May, the price will be 98 plus the accrued interest for a quarter of a year, or 15s. (one-quarter of the £3), or the market price will be 98¾; and the growth continues, in the same way, to the date when the next payment of interest becomes due, when on such payment being effected the price descends to 98 by the removal of that amount. This successive increase may be properly termed natural, for it is accordant with the nature of man not to part with a benefit without receiving its full equivalent - that is to say, in the present case the price of the capital itself of the bond with the increment of value which the accruing interest has conferred. Assume, then, that the day before the books are closed the bond is sold, but the transfer is too late for registration, or that the bond is disposed of while the books remain closed. On the day of sale the price of the bond would be increased, as has been shown, by the increment of the accruing interest or dividend; further, the name of the vendor would continue as the owner on the books, as the reader has been told, (until they were reopened), and the cheque for the interest or dividend would be forwarded to him; hence, if no interposing practice existed, he would receive the dividend or interest twice - first in the accrued amount, and secondly in the actual payment. Here, then, intervenes the rule of the Stock Exchange, and settles the ownership of the dividend declared or about to be paid. This rule defines the time, and marks that time by the attachment of the symbol against the quotation, when accordingly the price of the stock or shares on sales and purchases is fixed without the inclusion of the dividend or interest in question.

Actual Cases

The procedure and its equity can be best exemplified by adopting an actual case with comments. The reader should compare the following events with the different dates furnished, and he will then obtain a full comprehension and rule adapted to all instances. I take the 3 per cent debenture stock of a leading railway - the London and North-Western.

1. The half-year's interest was due on the 15th of January, 1908: the transfer books of the company were closed from the 1st to the 15th of January, both inclusive: the dividend warrants were posted on the 14th of January (in order to reach the holders on the due date): the stock was marked x d. in the official list on the 16th of January; and the account day on the Stock Exchange (following the rule already cited) fell on the 16th of January.

2. The stock is sold between the date of payment of the interest due in July 1907 and the 31st of December, 1907, inclusive - the day prior to the closing of the books - there thus being time to secure registration of the transfer before the closing, and the buyer's name substituted for the seller's. The purchaser would then receive the interest due on the 15th of January, as he would stand on the books as the owner when the accounts were prepared. The seller sustains no injury, since the price paid by the buyer contained the accrued interest from the 15th of July, 1907, or from the seller's date of purchase, to the date of sale - that is to say, his investment has yielded him the full return to the day when he disposed of it. If this passing of the interest from the vendor to the buyer were not effected, the current interest would be doubly received by the seller. When the purchaser obtains the interest on the 15th day of January he thus receives back in its amount the accrued interest which he had handed to the seller in the price, and interest also on his purchase-money from the time of his buying.