One of the things they never seem to tell you in investing school is that the ex-dividend date is one of the most important times in a company's year (or half-year, if the company makes six-monthly dividend distributions). That essential date can cause absolute chaos if you don't know it's coming, because it hits the share price. Absolutely, definitely, every single time.

I look at the question of dividends in Chapter 5. A dividend is the company's way of thanking you for your fidelity as a shareholder. In making the dividend payment, it's handing out some part of the profits that it's been making recently. And quite right too, because they're your profits – you do own the company, after all.

The dividend process normally occurs in four stages:

You may not be very surprised to hear that the share price generally tends to rise in the weeks leading up to the day before the ex-dividend date. Everybody wants a piece of the payout! Indeed, the rise in the share price will roughly mirror the value of the dividend – so if the dividend's going to be worth 5 per cent to shareholders, that's roughly the amount by which the share price will rise

But on ex-dividend day, guess what happens? Yes, the share price takes a hit, because anyone who was waiting for the dividend now has no incentive to hang on any longer.

That the share price should fall on ex-dividend day is perfectly logical. But what isn't so logical is that some people seem to think they can make some free money by buying a share in the run-up to the qualifying date and then selling once the dividend's been stripped out. Any stock market that's even remotely 'efficient' knocks that idea on the head by dropping the price on ex-dividend day. Doesn't it?

What can you do to protect yourself against making a goof over ex-dividend dates? First, make sure that you know in advance when the dividends are due to become payable, and keep a written list somewhere that you can look up in a hurry if the wobbles ever seem to have struckstrike the share price. Even if you don't know the precise date of the next one, you're pretty likely to find that it's within a few days of last year's date.

Where can you find about about ex-div dates? The company's last dividend statement, which is always available on the Stock Exchange Regulatory News Service, will generally give you a good idea as to when the next one's due. Or if the next date has been finalised, you can find out in an instant either from RNS or by by checking the FT's website (www.ft.com).

Figure 9-1 shows a summary of the trading position of Arriva shares.

Figure 9.1. Summary of Arriva trading position.

Unfortunately, the printed media aren't quite so good at giving you ex-dividend information at the time. But if you're reading the Financial Times share price pages, or some other listing with a similar amount of detail, you're likely to find the initials 'xd' for 'ex-dividend' buried among the hearts and clubs and other miscellaneous footnotes in the left-hand column. That's a sure sign that your company has passed its ex-dividend date, although usually you'll need to do some more research to find out exactly when.

Try also to make sure that you know about any special dividends the company may be making to its shareholders. A special dividend is a one-off cash distribution to shareholders – something that often happens after the company's sold one of its divisions, so that it's sitting on a cash pile that it would rather 'return to the shareholders' than keep in its war chest for a future acquisition. If the market has been expecting one of these special dividends for a while (and it may be quite big), it'll definitely dent the share price on ex-dividend day.

The same thing might apply if any other kinds of distribution are taking place. When Britain's big privatisations were going on in the 1980s and 1990s, it was common to find that investors were offered bonus shares if they held onto their shares until a given date. These distributions sometimes hit the share price in exactly the same way as a dividend.

It would be interesting, although also rather depressing, to wonder just how many investors have gone face first into their porridge from the near-terminal shock of discovering that their shareholdings have halved in value overnight thanks to the unexpected arrival of a scrip issue. And how many other people have gone out on an insane spending spree, believing themselves to be suddenly rich because a share price consolidation has sent the price of their shares rising tenfold?

Thousands, probably. Tens of thousands, possibly. And in both cases, the survivors won't have been much consoled by the morning-after realisation that one of the strangest tricks in the stock market's repertoire has temporarily misguided them. A trick that doesn't make anyone richer or poorer. A trick that's really quite expensive to perform, and leaves everyone exactly where they were before. So why on earth do companies do it?

A scrip issue (also known as a 'capitalisation issue' or a 'stock split') is what happens when a company decides to multiply the number of shares on the stock market by the simple device of issuing a lot more shares, free of charge, to all of its existing shareholders. Whereupon, inevitably, the stock market promptly adjusts the price of all the shares downward (the new shares and the old shares too), so that the market capitalisation of the company ends up exactly the same as it was before the change.

You now have 400 shares instead of 200. But you're not getting free money. The stock market will look at the shares, and it'll look at the company – and, not unreasonably, it'll figure that since the company has now got twice the number of shares it had yesterday, but becasueit's still the same company, the correct price for those shares will be 500p instead of 1,000p. Result: you now have (400 × 500p = £2,000) worth of shares. Just the same as before. Plus a possible cardiac arrest if you haven't been paying attention.

Why would any company do anything so stupid? I'm sorely tempted to say because a whole lot of daft people don't like paying £10 or more for a share, no matter how much of the company that gives them. In the same way that some people are addicted to 'penny shares', which cost small numbers of pennies, other investors are simply allergic to big numbers and would rather pay 500p for a share that only gives them half as much as a 1,000p share.

Of course, the company might not have gone for a nice and tidy one-for-one split. A nine-for-one scrip would have reduced the share price by 90 per cent from 1,000p to just 100p, in this particular instance. A two-for-three split would have left the company worth 600p per share, because there'd now be five shares doing the job that three used to do. And so on.

But the weird thing is that scrips seem to work. If a nine-for-one scrip chops the share price back to 100p, you can be pretty sure that within days it creeps back to 110p. Why? Smoke and mirrors, or human psychology. Maybe the reason is the rules of certain investment trusts, which don't allow their managers to buy a share for over 500p without consulting the boss, but give them the freedom to buy something cheaper on the nod. Who knows? Scrips do work, that's all I can say.

Consolidation issues are the same as scrip issues but in reverse. If a big company has seen a corporate disaster devastate its share price – candidates have included the jeweller Ratners or the rail contractor Jarvis – an issue of pride may be involved in 'relaunching' the shares at ten times their deflated valuation. It ought to make no difference that your 100 shares are now worth exactly the same as your old 1,000 shares were. An image question is at stake here.

How can you find out about scrip issues? Well, the official Regulatory News Service announcements always flag them up clearly in advance, for a start. But very occasionally, the information sources you find in the papers, and in the press too, haven't been adjusted as they should have. They're only run by machines, after all, and common sense isn't built into many computers. So from time to time you get an uncorrected figure that sends you running for the Alka-Seltzer. I've seen some pretty weird online charts produced after scrip and consolidation issues.

An old stock market adage states that you should never catch a falling knife. It's a gruesome image, certainly, but it's weirdly descriptive of the truth. If a share's in free-fall, twirling and twisting, your chances of grabbing it safely by the handle and avoiding injury from a dozen unforeseeable jagged edges are pretty minimal.

Yet at the same time, you're told that the best time to bag a bargain share is when panicky markets have driven it right down. A very good friend of mine, who was a pretty good investor considering his job was essentially manual farm labouring, made an absolute packet out of the electronics giant Marconi after it collapsed back in. And by getting out again a week later, he managed to lock it all in.

Other friends have not been so lucky, however. If you've been persuaded that a deeply stricken share is your best bet for a strong bounce-back, the advice is probably right. If you backed six companies in this situation and only one of them recovered as planned, you're probably still ahead.

To grab a bargain, then, what should you be looking for in the financial pages? Forget about the historical price/earnings ratio and the dividend yield), because a recent plunge may have skewed both out of all recognition. Focus instead on the debt situation, including the profile of the debt; that is, how much money the company owes in the next twelve months, and how much can wait till later. You find this information in the company's last set of accounts, and with luck it's also among the Regulatory News Service announcements.

How much competition exists in the sector? And what are the chances of a takeover? Again, background textual research is most likely to tell you what you need to know.

That said, an investor with the right sense of timing could trade a dead cat bounce and make money nearly every time. If you're good enough to be able to do that consistently, you don't need to be reading this book.

Free float is one of the most important of the many subjects that the trade prefers not to talk about. When you talk about a listed company and the way its shares behave, you may assume too easily that all the shares in the company are up for grabs all the time, and that the market's behaviour is a fair and free reflection of the changing values of those shares.

Not so. Every company has a proportion of shares that are simply not for negotiation, no matter what. They may include the directors' personal shareholdings; the shares the company's original backers hold; those of any venture capitalists; any larger companies that may control the target company, either partially or completely; and even in some cases, national governments themselves.

How do governments come to be such big shareholders? Mostly, as you can imagine, though partial privatisations that leave them still controlling large chunks of equity in the industries they used to own 100 per cent. Germany, Italy and France all have particularly large 'golden shares' that can obscure the view for private investors. But one thing you can definitely say is that whatever happens, the eventualities of the moment are unlikely to sway the holders of these shares when buying and selling. To all intents and purposes, you can regard their loyalty as a permanent fixture of the company.

That creates an interesting situation when a rush is on to buy these shares. When everyone wants to buy, an invisible bottleneck suddenly appears that stops them from getting the shares they want in the free market. And so the bottleneck can quickly create a horrific short-term imbalance between supply and demand. Companies with only a small free float are almost bound to be more volatile than companies with bigger free floats, because the supply's so tight.

The situation gets worse. One of the characteristics of automatic index trackers, a type of managed fund that will typically follow a whole stock market sector (see Chapter 14) is that often their managers have no autonomy whatsoever when deciding whether to buy the shares or not. Their statutes quite literally force them to buy shares at any price that becomes necessary. This means, in effect, that the issue of tight liquidity resulting from free float problems becomes so important that entire national governments occasionally come to blows about it.

In Britain, for instance, a company listed on the main market rarely has a free float of less than 50 per cent; in continental Europe or Japan, however, the ratio's often much lower than that because banks hold enormous proportions of their client companies' stocks. In 2007 only about 40 per cent of Volkswagen's shares were in free float, and Porsche, the company trying to take it over, had only about 10 per cent of its own shares available to the open market.

But before you run away with the impression that Britain's a temple of virtue where the free float's concerned, remember that different rules apply in the more lightly regulated Alternative Investment Market (AIM). Indeed, only a tiny proportion of an AIM-listed company needs to be in free float at all. So if the board owns 60 per cent of the equity and another 35 per cent is parcelled up among the institutions, your chances of getting a free and open-market price when you sell your shares are small indeed. Conversely, of course, if the AIM company ever becomes flavour of the month, you're the one who's laughing.

If this fact's any consolation, all of the FTSE indices these days are fully 'weighted' to take account of free float; that is, a company with a small free float gets a much smaller emphasis in the index's calculations than a company with a 75 per cent-plus free float (the level at which they get a 100 per cent weighting). But in America this doesn't apply so frequently. That's one of the reasons US stock market trackers tend to be so much more volatile than British ones.

You find information about free float? Unfortunately it's not that easy, mainly because different analysts have different ideas about how many shares are genuinely free and how many are effectively captive. But one popular source is the Financial Times website at markets.ft.com, where you can get a quote for the number of free-float shares for almost any UK-listed company. You then divide that number of free-float shares into the total number of shares in issue, which will give you a percentage figure.

So, for instance, the FT said in late 2008 that Tesco had a free float of 7.78 billion shares, against a total 7.86 billion shares outstanding. The free float ratio was therefore an impressive 99 per cent. But British-American Tobacco, which has several large 'strategic' investors, had 1.38 billion free float shares against 2.00 billion shares in issue - a ratio of only 69 per cent.

Ah, EBITDA. The Enron meltdown in 2001 possibly first drew Britain's attention to the transatlantic fashion for Earnings Before Interest, Taxes, Depreciation, and Amortisation. Or, as it soon became popularly known, 'Earnings Before I Tricked the Dumb Auditors'. Here's why.

Enron was one of the world's mightiest electricity, gas, paper and communications companies, with a reach that extended all the way from its native Texas to India, China and beyond. Fortune magazine named it as 'America's Most Innovative Company' for six consecutive years But all that glory ended in 2001, when it was revealed that its innovative instincts had been turned to setting up the biggest case of creative accountancy the world had ever seen. Lax supervision by the US financial authorities had allowed Enron to bypass some of the normal checks and balances on its reporting standards, and it had been playing fast and loose with the facts in a number of ways - not least, by inventing fictitious trades between its various divisions so as to boost its apparent earnings way beyond their actual level. And by mis-stating the cost of its borrowings and expenditures through a range of dubious activities too dubious to mention.

Normally, this massive fraud would have been picked up by a routine examination of the company's accounts. But it had been able to falsify its figures, among other things, by diverting investors' attention toward its EBITDA figures, which really weren't the real deal at all. I'll spare you the gory details of what followed: suffice it to say that the company went bust, several of the directors went to jail, and the workforce lost most of its accumulated pension funds.

Anyway, Enron spelt the end of Arthur Andersen, the accounting firm that had made such ultimately disastrous use of EBITDA's simplistic appeal. And the world became a safer, wiser place. But many great ideas haven't been properly tested until they've been through the furnace, and now that Enron's demise is firmly in the past, the time may have come to conquer the scepticism and take a closer look at this friendly little beast.

Friendly is certainly a good word to start off with. You don't have any trouble finding mentions of EBITDA in the financial media. If you look up any set of company accounts, or (more particularly) any investment analyst's survey of a listed company, you're likely to find the EBITDA figures right there in front of you, in black and white. Any PR company worth its salt makes sure that the media get told about the EBITDA results, because they're often easier on the eye than the more complex results the authorities are interested in.

EBITDA is great. Unlike the cashflow statements on any normal company's accounts, EBITDA does away with all the boring bits. It abolishes the complexities of figuring out the cost of servicing debts, the depreciation and write-down rates for capital assets like factories and equipment, and a whole lot of other boring things besides. Instead, EBITDA focuses attention purely on important stuff like sales, operating profit margins and so forth. It behaves almost as if the whole question of buying and affording assets was a bit of an irrelevance to the way you should be looking at companies.

Are any alarm bells ringing in your head yet? Good. Warren Buffett, the world's most successful investor, once accused the people who use EBITDA of believing in the tooth fairy. Who else, he asked, did they think was magically bringing in the essential plant, equipment, and expansion funding for all these companies? Aren't people kidding themselves if they think they can safely ignore the cost of these things?

Bearing in mind how badly some companies are already in debt, he had a point. But for me, what makes EBITDA even less reliable is that it has absolutely no firm rules for the calculation, only a sort of general agreement on the principles. The accountants who cook up these figures have enormous scope for 'creativity'. Don't take everything the EBITDA figures say as the absolute truth. Instead, remind yourself that the main American accounting protocol, the US GAAP rules, doesn't acknowledge the validity of EBITDA. And nor do I, for that matter. The next time you see it, reach for the salt and take a large pinch.

Can you measure the effect short sellers have on the overall market? And can old-fashioned 'long' investors (i.e. people who buy shares for long -term capital growth) discover any useful information ?

Short sellers can do a lot of damage to a company's share price performance. If a large group of people identify a troubled company as a candidate for shorting, they often push its share price down well below the level which the majority of people might call a 'sensible level'. That situation's called a 'bear raid', and it can be pretty horrible for the company on the receiving end.

Where do you find out who's shorting what? Up to a point you're on your own, because stockbrokers don't usually hand out this sort of information willingly. If they ever did let the world know how much stock they were lending out to short sellers, they'd quickly start new waves of shorting even bigger than the ones they were reporting.

The awkward fact is that a very large proportion of the shorting going on in Britain is the work of hedge funds (Chapter 14 covers these). Hedge funds are unique for two reasons. First, they can deal in literally anything they like – gold, currencies, commodities, futures, emerging markets, anything – and they can shift their strategy in the time they take to press a button on a keyboard. And second, hedge funds are notoriously secretive about their activities. You can't easily establish just what a particular hedge fund has been doing on any one day. (Your best bet is probably to read the gossip columns of the key financial newspapers, because I doubt that anybody else can give you any more solid information.)

But don't despair, because some private research agencies give you an informed online guess of how many shares have been lent out for shorting. The most prominent one is called Data Explorers (www.dataexplorers.co.uk), which provides a series of feeds to the newspapers. You might like to try Googling the company's name to see which papers have been reporting its findings recently. An alternative approach is to look up one of the many websites run by professional shorting specialists, for example Simon Cawkwell A particularly famous example in Britain is Mr Simon Cawkwell, who styles himself Evil Knievel and who has built up a dedicated following among professional bears. But of course, by the time you read this the chances are that somebody else will have stolen his limelight.

Data Explorers runs a shorting blog at shortstories.typepad.com, which is probably going to be a bit more detailed than a beginner would really feel comfortable with. But then, I wouldn't recommend that you try your hand at shorting until you've been sitting on the sidelines and watching for a while. It can be a steep learning curve – but then, when you consider the downside risks, you'll probably agree that it's worth finding out everything you can before you give it a try.