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Understanding the different aspects of the stock market is the key to making informed and wise investment decisions. Of the many factors, keeping track of the stock’s opening and closing prices is one of the fundamental things investors do before trading that stock.
Like the closing price, understanding how adjusted closing price works, is important for investors. The adjusted close price represents a stock’s actual value more accurately. In today’s article, let us understand what adjusted closing price means and why it is necessary for investors in decision-making.
What is the adjusted closing price?
A stock’s closing price, as we all know, is the price at which the stock trades before the market closes for the day. However, this figure is raw and may not include the required factors. That is where the adjusted closing price comes into the picture.
The adjusted closing price alters the raw closing price to consider the effect of corporate actions like dividends, stock splits, stock consolidations, and other actions since the firm’s listing on the stock exchange.
Understanding the difference between the adjusted closing price vs. the closing price is crucial as it helps investors look at the appropriate factor while making investment decisions.
Calculating the adjusted closing price
Adjusted close price formula: Closing price +/- Adjustments due to corporate actions.
The first step to calculate the adjusted closing price is to analyse the monetary impact of a corporate action. This number is then added or subtracted from the stock’s closing price to reflect the adjustment.
Importance of adjusted closing price
The adjusted closing price properly represents a stock’s historical performance and makes a provision for all changes in the firm’s capital structure.
It allows investors to make accurate performance analyses of stocks by considering the effects of significant corporate actions such as splits and dividends. Analysing two stocks using the adjusted closing price provides for an apple-to-apple comparison and helps in more authentic results.
With the adjusted closing price, investors can understand the true return on their investments, unlike the returns calculated based on raw closing price, which may be incomplete. Technical analysts also use the adjusted closing price to capture historical data to forecast future movements.
Example of the adjusted closing price
Usually, when a stock declares a dividend, its price goes down. This is because a dividend is paid out of the firm’s profits to shareholders instead of investing it back into the business.
Similarly, when a stock is split, shares outstanding in the market goes up and the price per unit falls.
For example, Company ABC announced a stock split in the ratio of 3:1. Before the stock split, ABC had 1,000 shares, and the stocks closed at ₹300. After the split, the number of stocks increased to 3,000 (1,000 *3) and the close price per share was adjusted to factor in the impact of the splitting. So, the adjusted closing price stood at ₹100 (₹300/3).
Consider the real-world example of Reliance Industries. Though the closing price and adjusted closing price are the same now, they have been different for more than a year until August 2023.
As of 18 August 2023, Reliance Industries’ closing price was ₹2,556.80, whereas the adjusted closing price was ₹2,547.80.
Challenges in maintaining accurate adjusted closing prices
One of the primary channels to maintain accurate adjusted prices is getting accurate details on corporate actions. Different publications may provide details about corporate actions with some changes in numbers. Such changes can significantly affect the adjusted closing price. Hence, it is always advised to rely on official information on the company’s website while calculating the adjusted closing price.
Besides, corporate actions are dynamic. Hence, it is essential to check the adjusted closing price regularly to ensure it is in line with the effects of all corporate actions to date.
Conclusion
As financial markets continue to evolve and grow, the role of accuracy in data analysis for investment decisions is becoming more critical. Hence, adjusted closing price is an indispensable tool for investors and analysts to analyse a stock’s performance.
The adjusted closing price is a fundamental concept that represents a stock’s closing price after making adjustments to it based on corporate actions. Using the adjusted closing price over the raw closing price helps investors ensure accuracy in their decisions.
FAQs
The closing price is calculated by considering a weighted average of a stock’s trading prices in the last half an hour before the market closes.
To calculate the adjusted closing price, one must first calculate the impact of the corporate action. Based on how the corporate action affects the stock price, the impact is added or subtracted from the existing closing price.
The adjusted closing price is more accurate as compared to the raw closing price. Since the adjusted closing price accounts for changes in the stock’s capital, using this for analysing and calculating returns provides better results.
Dividends are removed from the company’s profits and distributed to shareholders. Since stock prices are highly dependent on profits, distributing dividends to shareholders brings the profits down, hence affecting the stock prices. To show the impact of dividends on stock prices, dividends are subtracted from closing prices to arrive at adjusted closing prices.
last price and closing price are not the same.
The last price represents the price of the last transaction of a stock before the market closes. The closing price is a weighted average of trading prices of a stock in the last half an hour before the market closes. The last price is a single value, whereas the closing price is an average and summarises the performance of the stock before market closing.