What Is the Adjusted Closing Price?
The adjusted closing price modifies a stock’s closing price to reflect its value after accounting for corporate actions. This metric is essential for those examining historical returns and conducting detailed past performance analysis.
Key Takeaways
- Adjusted closing prices reflect stock value after accounting for corporate actions.
- The raw closing price represents the last cash value transacted before market close.
- Corporate actions such as stock splits, dividends, and rights offerings are factored into the adjusted closing price.
- Adjusted closing prices can obscure key nominal prices and short-term trends post-splits.
Mastering the Adjusted Closing Price
Stock values come in two formats: the closing price and the adjusted closing price. The closing price is simply the cash value of the last transaction before the market closes. In contrast, the adjusted closing price considers post-market corporate actions that may affect the stock’s value.
Investor attention should be on how these corporate actions—like stock splits, dividends, and rights offerings—are integrated into the stock’s adjusted closing price. This adjusted price helps analysts paint a precise picture of a firm’s historical performance.
Types of Adjustments
Adjusting Prices for Stock Splits
Stock splits make shares more accessible to average investors without altering a company’s market capitalization, though they impact stock price.
Example: Suppose a company’s board decides on a 3-for-1 stock split. If shares close at $300 before the split, the value is adjusted to $100 post-split, maintaining consistency in price records and analysis.
Adjusting for Dividends
Both cash dividends and stock dividends affect the stock price. While cash dividends offer shareholders a set price per share out of the company’s assets, stock dividends provide additional shares.
Example: If a stock trading at $51 declares a $1 cash dividend, the post-dividend price would be adjusted to $50. Accounting for this provides a clearer picture of investment returns.
Adjusting for Rights Offerings
Rights offerings give shareholders the option to buy additional shares proportionate to their current holdings, often at a discount, leading to dilution.
Example: Consider a stock trading at $50 with a rights offering entitling shareholders to purchase more shares at $45. The adjusted closing price will reflect this decrease in share value due to dilution.
Benefits of the Adjusted Closing Price
-
Enhanced Performance Evaluation: Adjusted closing prices help investors accurately assess returns, unaffected by sudden price drops due to splits or dividends.
-
Uniform Comparison: Adjusting prices allows better comparison across multiple assets, indicating the true profitability of value stocks and dividends over various asset classes.
Criticism of the Adjusted Closing Price
The raw, or nominal, closing price offers insights into specific market movements, often lost in adjusted prices. Key price levels like $100 can drive significant market behavior, from support and resistance patterns to breakouts and breakdowns, obscured in the adjusted versions.
Real-life instances like the Dow 1,000 level’s pivotal role during the 1966-82 bear market illustrate why actual closing prices can be instrumental in historical context comprehension and speculative strategies.
Related Terms: stock splits, dividends, corporate actions, historical returns, market capitalization.
References
- S&P Dow Jones Indices. “Dow Jones Industrial Average”. Download required.
- William J. O’Neil. “How to Make Money in Stocks”. McGraw-Hill, 1995.
