Constituent stocks of an index will periodically pay dividends to shareholders. When they do, this impacts the overall value of the index causing it to drop by a certain amount.
It’s important to remember that leveraged index traders can neither profit nor lose from these price movements, as they’re scheduled public events. Were a trader able to profit from these movements, they’d simply place a large short position just before the adjustment and close out just after, locking in the drop in the value.
If you have an open position through a dividend adjustment, we’ll ensure that there is no material impact on you by either crediting or debiting your ledger with the exact amount you have incurred as additional running loss/profit due to the dividend adjustment.
Let’s look at some examples:
You are long £10 a point of the FTSE 100 at 5:30pm when there is a dividend adjustment that takes 7.8 points off the index. Our FTSE 100 price drops by 7.8 points, so your running profit and loss (P&L) is reduced by 7.8 x £10 = £78. We therefore credit your ledger with £78, to negate this drop in P&L.
Now let’s say you’re short two standard lots of Wall Street Cash at 10pm 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.