A:

When trading is done for the day on a recognized exchange, all stocks are priced at close. The price that is quoted at the end of the trading day is the price of the last lot of stock that was traded for the day. This is called a stock's closing price. The final stock price that is quoted can be used by investors to compare a stock's performance over a period of time. This period is usually from one trading day to another.

During the course of a trading day, many things can happen to affect a stock's price. Along with good and bad news relating to the operations of a company, any sort of distribution that is made to investors will also affect stock price. These distributions can include cash dividends, stock dividends and stock splits.

When distributions are made, the adjusted closing price calculations are quite simple. For cash dividends, the value of the dividend is deducted from the last closing sale price of the stock. For example, let's assume that the closing price for one share of XYZ Corp. is $20 on Thursday. After close on Thursday, XYZ Corp. announces a dividend distribution of $1.50 per share. The adjusted closing price for the stock would then be $18.50 ($20-$1.50).

If XYZ Corp. announces a 2:1 stock dividend instead of a cash dividend, the adjusted closing price calculation will change. A 2:1 stock dividend means that for every share an investor owns, he or she will receive two more shares. In this case, the adjusted closing price calculation will be $20*(1/(2+1)). This will give you a price of $6.67, rounded to the nearest penny.

If XYZ Corp. announces a 2:1 stock split, investors will receive an extra share for every share they already own. This time the calculation will be $20*(1/(1x2)), resulting in an adjusted closing price of $10.

We have examined the simplest and most common corporate actions that can affect a stock's closing price. However, if a more complicated action, such as a rights offering, is announced, the adjusted closing price calculation can become quite confusing. Historical price services provided by financial sites such as Yahoo! Finance eliminate the confusion by calculating adjusted closing prices for investors.

To learn more, see What Are Corporate Actions?, Understanding Stock Splits and Which is better a cash dividend or a stock dividend?

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