What is an Adjusted Closing Price?
Adjusted closing price amends a stock's closing price to accurately reflect that stock's value after accounting for any corporate actions. It is considered to be the true price of that stock and is often used when examining historical returns or performing a detailed analysis of historical returns.
Understanding Adjusted Closing Price
Stock prices values are stated in terms of it's 'closing price' and it's 'adjusted closing price'. The closing price is the 'raw' price which is just the cash value of the last transacted price before the market closes. The adjusted closing price factors in anything that might affect the stock price after the market closes.
A stock's price is typically affected by supply and demand of market participants. However, some corporate actions, such as stock splits, dividends / distributions and rights offerings, affect a stock's price and adjustments are needed to arrive at a technically accurate reflection of the true value of that stock. Investors should understand how corporate actions are accounted for in a stock's adjusted closing price. It is especially useful when examining historical returns because it gives analysts an accurate representation of the firm's equity value.
- Adjusted closing price amends a stock's closing price to accurately reflect that stock's value after accounting for any corporate actions.
- The closing price is the 'raw' price which is just the cash value of the last transacted price before the market closes.
- Adjusted closing price factors in corporate actions such as stock splits, dividends / distributions and rights offerings.
Adjusting Prices for Stock Splits
A stock split is a corporate action deployed 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 before its stock split, the closing price is adjusted to $100 ($300 divided by 3) per share to show the effect of this 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 that 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.
While dividends are welcomed by shareholders, they actually lower the value of each share of company stock. The reason is that profits are being disbursed to shareholders instead of being reinvested back into growing the company which is seen as devaluing the company. This devaluation will be captured by the adjusted closing price.
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. This will lower the value of existing shares because supply increases have a dilutive effect on the existing 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 can 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.