Adjusted Closing Price

3 key takeaways

• The adjusted closing price accounts for corporate actions like dividends and stock splits.
• It provides a more accurate reflection of a stock’s value and performance over time.
• Investors and analysts use adjusted closing prices to compare historical prices and calculate returns.

What is the adjusted closing price?

The adjusted closing price is the end-of-day price of a stock that has been modified to include the effects of corporate actions that have occurred since the stock was issued. These adjustments are made to provide a more accurate reflection of the stock’s true value and to enable a fair comparison of the stock’s historical prices.

Importance of adjusted closing price

The adjusted closing price is crucial for accurately analyzing a stock’s performance over time. By accounting for corporate actions, it ensures that price comparisons and return calculations reflect the true economic impact of such events. This adjusted price helps investors and analysts make informed decisions based on historical data that is consistent and comparable.

How the adjusted closing price works

1. Dividends: When a company pays dividends, the stock price typically drops by the dividend amount. The adjusted closing price accounts for this by adding back the dividend to the closing price.
2. Stock splits: In the event of a stock split, the number of shares increases, and the price per share decreases proportionally. The adjusted closing price reflects the split to maintain continuity in price series.
3. Reverse stock splits: Similar to stock splits, but the number of shares decreases and the price per share increases proportionally.
4. Rights offerings and spin-offs: Adjustments are also made for other corporate actions like rights offerings or spin-offs, which can affect the stock price.

Examples of adjusted closing price

• Dividend adjustment: A company with a stock that closes at $50 pays a $2 dividend. The adjusted closing price would account for the dividend by adding it back, reflecting the impact of the dividend payment.
• Stock split adjustment: If a company with a stock priced at $100 undergoes a 2-for-1 stock split, the price per share is halved to $50. The adjusted closing price would reflect this split, ensuring that historical comparisons are accurate.

Real-world application

Consider an investor analyzing the historical performance of a stock that has undergone multiple stock splits and paid several dividends. By using the adjusted closing price, the investor can accurately assess the stock’s performance over time without the distortions caused by these corporate actions. For example, if a stock closed at $100 but underwent a 2-for-1 split, the adjusted closing price would reflect the split, allowing the investor to see the equivalent value pre- and post-split.

Understanding the adjusted closing price is essential for investors who want to make accurate historical comparisons and calculate returns. It provides a clearer picture of a stock’s true performance by accounting for corporate actions that affect its price. To further explore related concepts, you might look into stock price adjustments, historical stock performance analysis, and investment return calculations.