Adjusted closing price refers to a stock’s closing price on a given trading day that has been adjusted to reflect company actions that have an impact on the stock price. These changes are required to provide a more accurate picture of the stock’s true worth over time, particularly when comparing past performance or computing returns.
Purpose of Adjusted Closing Price
1) Corporate Action:
- Adjustments are typically made for stock splits, reverse splits, dividends, rights offers, and mergers/acquisitions. These occurrences can have a big impact on the stock price without reflecting the underlying worth of the company.
2) Continuity of Analysis:
- By accounting for business actions, the adjusted closing price promotes consistency in price analysis across time periods. This is critical in technical analysis, portfolio performance review, and financial modeling.
Calculate the Adjusted Closing Price
1) Stock splits:
- In a stock split, the number of outstanding shares rises, while the stock price falls accordingly to retain the same market capitalization. The modified closing price reflects this change by dividing the closing price by the split ratio.
2) Dividends:
- When a firm declares a cash dividend, the stock price usually falls by the amount of the dividend on the ex-dividend date. The adjusted closing price is the closing price less the dividend amount to reflect the payment to shareholders.
Importance of Investment Analysis
1) Performance Measurement:
- To effectively analyze the performance of their investments, investors utilize adjusted closing prices, which account for both price fluctuations and dividend income.
2) Technical Analysis:
- Using adjusted closing prices, chartists and technical analysts can spot trends, support/resistance levels, and price patterns that are not distorted by company actions.
Example:
Assume a company’s stock closed at $100 prior to a 2-for-1 stock split. Following the split, the adjusted closing price would be $50 ($100 / 2), accounting for the increased number of outstanding shares.
Conclusion:
Adjusted closing prices help to provide a clear and consistent representation of a stock’s historical performance by accounting for company actions that affect its price. This ensures that investors and analysts can make informed judgments based on reliable data, whether they’re reviewing past performance, conducting technical analysis, or forecasting future stock market trends.
