What is an 'Adjusted Closing Price'

An adjusted closing price is a stock's closing price on any given day of trading that has been amended to include any distributions and corporate actions that occurred at any time prior to the next day's open. The adjusted closing price is often used when examining historical returns or performing a detailed analysis on historical returns.

BREAKING DOWN 'Adjusted Closing Price'

A stock's price is typically affected by supply and demand of market participants. However, there are some corporate actions that affect a stock's price, which needs to be adjusted in the event of these actions. The adjusted closing price is a useful tool when examining historical returns because it gives analysts an accurate representation of the firm's equity value beyond the simple market price. It accounts for all corporate actions such as stock splits, dividends/distributions and rights offerings. Investors should understand how corporate actions are accounted for in a stock's adjusted closing price.

Adjusting Prices for Stock Splits

A stock split is a corporate action that is usually done by companies to make their share prices more marketable. A stock split does not affect a company's total market capitalization, but it does affect the company's stock price. Consequently, a company undergoing a stock split must adjust its closing price to depict the effect of the corporate action.

For example, a company's board of directors may decide to split the company's stock three-for-one. Therefore, the company's shares outstanding increase by a multiple of three, while its share price is divided by three. If a stock closed at $300 the day prior to its stock split, the closing price is adjusted to $100, or $300 divided by 3, per share to show the effect of the corporate action.

Adjusting for Dividends

Common distributions that affect a stock's price include cash dividends and stock dividends. The difference between cash dividends and stock dividends is shareholders are entitled to a predetermined price per share and additional shares, respectively. For example, assume a company declared a $1 cash dividend and is trading at $51 per share on the ex-dividend date. On the ex-dividend date, the stock price is reduced by $1 and the adjusted closing price is $50.

Adjusting for Rights Offerings

A stock's adjusted closing price also reflects rights offerings that may occur. A rights offering is an issue of rights given to existing shareholders, which entitles the shareholders to subscribe to the rights issue in proportion to their shares. For example assume a company declares a rights offering, in which existing shareholders are entitled to one additional share for every two shares owned. Assume the stock is trading at $50 and existing shareholders are able to purchase additional shares at a subscription price of $45. On the ex-date, the adjusted closing price is calculated based on the adjusting factor and the closing price.

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RELATED FAQS
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