When trading is done for the day on a stock 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 referred to as the stock's closing price.
That closing price is the reference point used by investors to compare a stock's performance over a period of time.
- The closing price of a stock is the key point of reference for tracking its price over time.
- However, the closing price will not reflect the impact of cash dividends, stock dividends, or stock splits.
- An investor can calculate the change in price or use a historical price service.
It's worth noting that closing prices do not reflect after-hours prices or any corporate actions that might alter the stock's price from time to time, although they act as useful markers for investors to assess changes in value over time.
Good or bad news related to a company, its industry, or the economy overall can affect the price of any stock during the day. Less often but equally important, any distribution that is made by the company to shareholders will also affect the stock price.
These distributions may include cash dividends, stock dividends, or stock splits.
Calculating Adjusted Closing Price
When distributions are made, the adjusted closing price calculations are simple. For cash dividends, the value of the dividend is deducted from the last closing sale price of the stock.
The adjusted closing price is used when tracking or analyzing historical returns.
For example, let's assume that the closing price for one share of XYZ Corp. is $20 on Thursday. After the 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)), indicating an adjusted closing price of $10.
These are the simplest and most common corporate actions that can affect a stock's closing price. There are other actions such as an announcement of a rights offering that make determining the adjusted closing price more complicated.
Historical price services provided by financial sites such as Investopedia and Yahoo! Finance can solve the problem by calculating adjusted closing prices for investors.