Definition
Ex-dividend means that from that day on, anyone who buys the stock no longer has the right to receive the current dividend. So on the ex-dividend date, trading tends to start at a price that is, in theory, lower by the value of the dividend. In Korean, the term (baedang-rak) carries the sense that the right to the dividend has "fallen off."
Why does a tree lose value once the apples are picked?
Imagine selling an apple tree that's loaded with apples. You could charge a high price: the value of the tree itself, plus the apples hanging on it.
But what if the owner picks every apple, puts them in a basket, and then brings the bare tree to market? Of course, it would make sense to take the price of those freshly picked apples off the tree's price.
The same thing happens in the stock market. A company promises to share the money it earned during the year with its shareholders as a "dividend" (a kind of bonus). Once the last day to collect that dividend passes, anyone who buys the stock starting the next day won't get this dividend. So the market opens with the value of the dividend you can no longer receive already taken out of the stock price.
Because the company's vault got lighter
Some people feel it's unfair and ask, "Why does the stock start out lower?" But from the company's point of view, it's a perfectly natural calculation.
To pay shareholders a cash dividend, a company has to take cash out of its own bank account. Say a company holds 10 billion won in cash and pays out 1 billion won as dividends. Now only 9 billion won is left in its vault.
The company's assets have shrunk, so it makes sense that the value of one share, a slice of that company, shrinks too. In other words, the ex-dividend drop isn't a penalty meant to hurt anyone. It's an honest way for the stock price to reflect the fact that money moved from the company to shareholders' accounts.
To be a bit more precise
The price falls on the ex-dividend date not because the exchange forces it down. In Korea, for cash dividends, the exchange doesn't forcibly lower an individual stock's opening price. It simply uses the previous day's closing price as the reference price.
Instead, many investors know the dividend right is gone, and they place their orders before the market opens. That's how an opening price lower by the value of the dividend forms on its own in the market. If a 10,000 won stock pays a 1,000 won dividend, investors will place buy orders around 9,000 won, the price without the dividend.
By the way, so that stock indexes aren't distorted by dividends, the exchange calculates a "theoretical ex-dividend index" and shows it to investors as a reference. Right after the market opens, each stock's actual price moves up and down actively, depending on market sentiment and the outlook for the company's earnings.
Common misconceptions
If the stock price drops on the ex-dividend date, shareholders always lose money.
The price falls, but you receive that much in dividends in your account. So in theory, a shareholder's total value (stock value plus dividend) is about the same as just before the ex-dividend date. Taxes are taken out of the dividend, though, and that day's price can still rise or fall further depending on the market.
Where you meet it
For a company with a December fiscal year-end and a December 31 record date, the day after the last day you can buy to receive the dividend (the ex-dividend date), the stock tends to open lower by about the expected dividend. These days, many companies set the record date separately, in February or March of the following year.
If a 50,000 won stock is going to pay a 2,000 won dividend, investors' orders on the morning of the ex-dividend date will push the opening price to around 48,000 won.
In one sentence
The stock price naturally drops in the market by the amount of the lost dividend right, so the company's value and the actual right line up.