What Is the Adjusted Closing Price?
Let me explain the adjusted closing price directly: it's a stock's closing price that's been modified to account for corporate actions like stock splits, dividends, and rights offerings. You use it when you're looking at historical returns or diving into a detailed analysis of past performance.
Key Takeaways
- The adjusted closing price amends a stock's closing price to 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.
- The adjusted closing price factors in corporate actions, such as stock splits, dividends, and rights offerings.
- The adjusted closing price can obscure the impact of key nominal prices and stock splits on prices in the short term.
Understanding the Adjusted Closing Price
When you look at stock values, they're often stated in terms of the closing price and the adjusted closing price. The closing price is straightforward—it's the raw cash value of the last trade before the market closes. But the adjusted closing price takes into account anything that might affect the stock price after hours, like corporate actions.
You know how stock prices are driven by supply and demand from market participants. However, actions like stock splits, dividends, and rights offerings directly impact the price. These adjustments give you an accurate record of the stock's performance. I recommend you understand how these corporate actions are factored into the adjusted closing price—it's crucial for examining historical returns, as it provides a true picture of the firm's equity value.
Types of Adjustments
Let's break down the main types of adjustments you encounter.
Adjusting Prices for Stock Splits
A stock split is a corporate move to make shares more affordable for average investors. It doesn't change the company's total market capitalization, but it does affect the stock price. For instance, if a board decides on a 3-for-1 split, shares outstanding triple, and the price is divided by three. Say a stock closed at $300 before the split; the adjusted closing price becomes $100 to keep comparisons consistent. All prior closing prices get divided by three as well.
Adjusting for Dividends
Dividends that affect stock prices include cash and stock types. Cash dividends give you a set price per share, while stock dividends provide additional shares. Take a company declaring a $1 cash dividend while trading at $51—the price drops to $50 because that dollar is no longer in the assets. But dividends contribute to your returns, so subtracting them from past prices gives you the adjusted closing price and a clearer view of performance.
Adjusting for Rights Offerings
The adjusted closing price also accounts for rights offerings, where existing shareholders get rights to buy more shares proportionally. This dilutes the value of current shares by increasing supply. For example, if a company offers one new share for every two owned, with the stock at $50 and new shares at $45, the adjusted price is calculated using an adjusting factor applied to the closing price.
Benefits of the Adjusted Closing Price
The primary benefit is that adjusted closing prices simplify evaluating stock performance. They help you see what returns you'd have gotten from investing in an asset. A 2-for-1 split doesn't mean you lose half your money, and without adjustments, graphs of repeatedly splitting stocks would be misleading.
They also let you compare performances across assets. Ignoring dividends understates value stocks' profitability. For long-term comparisons between asset classes, like high-yield bonds whose prices fall but yields compensate, adjusted prices reveal the full picture.
Important Note
The adjusted closing price gives the most accurate record of returns for long-term investors designing asset allocations.
Criticism of the Adjusted Closing Price
The nominal closing price carries useful information that gets lost in adjustments. Speculators often place orders at round numbers like $100, creating battles between bulls and bears that can lead to breakouts or breakdowns. Adjusted prices hide these dynamics.
By checking the actual closing price from the time, you get a sense of what was happening and can relate to historical accounts. Look at the Dow 1,000 level in the 1966-1982 bear market—it repeatedly hit and fell back until breaking out in 1982, never dropping below again. Adjustments with dividends somewhat mask this.
In general, adjusted prices are less helpful for speculative stocks. Historical examples, like Anaconda Copper's key prices or modern ones like Netflix and Tesla, show nominal levels matter. Stock splits can even signal declines, and while it might seem irrational, it's often a self-fulfilling prophecy in the market.
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