What Is Do Not Reduce (DNR)?
A do not reduce (DNR) order is a type of order with a specified price that does not get adjusted when the underlying security pays a cash dividend. Since a cash dividend reduces the assets of the company and transfers that wealth to the shareholder, the stock will drop by the amount of the dividend, all else being equal. Therefore, brokers adjust orders to reflect this change. If the order is tagged as DNR, the price on the order will not be altered to account for the dividend payment.
- A do not reduce order (DNR) keeps the specified price on an order, instead of the order price being reduced by the amount of a cash dividend on the ex-dividend date.
- Good 'till canceled (GTC) order prices are typically reduced by the amount of the cash dividend on the ex-dividend date.
- Reducing GTC order prices by the amount of the dividend on the ex-dividend date is standard practice by brokers in the stock market.
Understanding Do Not Reduce (DNR)
Investors who use good ‘til canceled (GTC) orders must be aware that their order’s specified price will be reduced with the distribution of cash dividends. The reduction of a GTC order's specified price is a market practice that helps to keep the order price in line with the market’s activity.
When a company pays a dividend to shareholders, the company is no longer holding that cash. Therefore, the value of the company should drop by the amount of the dividend paid. This reduction occurs on the ex-dividend date. All else being equal, if the stock closes at $50 on the day prior to the ex-dividend date, and pays a $0.10 dividend, the stock should open at $49.90 on the ex-dividend date. In the real world, other factors affect the price as well, so the stock may not open at the theoretical value.
Orders would also be adjusted by $0.10 to reflect the change in value of shares due to the dividend payment. A limit order to buy at $47 would be reduced to $46.90, for example.
Investors who wish for their specified price to remain unchanged through cash distributions can do so through a DNR order. Each broker has their own way of instituting DNR orders. The investor may have to notify their broker that they would like a particular order to not be reduced. If an investor does not request DNR then the specified order price on their GTC order will be reduced on the company’s ex-dividend date.
While not always practical, instead of placing a DNR order the trader can manually adjust the price of their order back to the level desired following the adjustment. They will be subject to their order being filled between the time of adjustment and when the trader manually adjusts it back.
DNR vs. GTC orders
Do not reduce is typically a stipulation that an investor must request when placing a GTC order with a specified price. Investors have the option to place GTC buy or sell orders on underlying securities at their discretion.
GTC orders can be advantageous for investors for a variety of reasons. Popular GTC orders include limit buy, limit sell, and stop orders.
A limit buy order is an order to buy a security at or below a specified price. A limit sell order is an order to sell a security at a specified price or higher.
A sell stop order is an order to sell at a specified price or below. A buy stop buys at a specified price or above.
All of these orders can help an investor to manage their personal risk tolerance when making a trade.
A stop order to exit a position, called a stop loss, provides a way to potentially cap losses, while limit sell orders provide a way to lock in profits. Limit buy orders allow the investor to control their entry point into the investment.
With any of these orders, a trader or investor can request that the price they specify not be reduced when the company (stock) pays a dividend.
DNR Trade Order Example
Assume a customer has placed a GTC limit order to buy 100 shares of Apple Inc. (AAPL) at $205. The stock closed at $207.25 on the day prior to the ex-dividend date. Apple pays a $0.77 quarterly dividend, so on the ex-dividend date, the price of the stock falls by $0.77 as the cash no longer belongs to the company. Therefore, the opening price on the ex-dividend date is $206.48 ($207.25 - $0.77). The dividend payment is not the only factor that affects a stock's price; the actual opening may differ from the theoretical price.
Regardless of what price the stock actually opens at, unless the customer has specified the limit buy order as a do-not-reduce (DNR) order, then the buy price on the order will be adjusted to $204.23 ($205 - $0.77). If a DNR order is provided, then the buy order will remain at $205.