The adjusted closing price is a calculation adjustment made to a stock’s closing price. The original closing price is the final price in which a stock, or any other particular kind of security, trades during market hours on that specific trading day.
However, the original closing price does not exemplify the most accurate valuation of the stock or security since it will not account for any actions that could’ve caused the price to shift. Therefore, an adjusted closing price will include any adjustments that need to be made to the price.
The adjustments made are to compensate for anything that could’ve affected the stock’s value, such as a corporate action. The corporate actions can include dividends or stock splits. The adjustment made to the closing price will display the true price of the stock or security because certain outside factors could’ve altered the true price.
Overall, the adjusted closing price includes a more complex analysis as it takes into account additional factors, which, in turn, will exemplify a more accurate reflection of the stock’s true value.
The adjusted closing price is a calculation adjustment made to a stock’s closing price.
It is more complex and accurate than the closing price.
The adjustment made to the closing price displays the true price of the stock because outside factors could’ve altered the true price.
Adjusted Closing Price and Stock Splits
A stock split is a corporate action that takes place when a company increases the number of shares in their company. It results in a decrease in the market price of the individual shares and an increase in the number of shares. The stock split can be done in an attempt to lower the price of individual shares for investors. In such a case, the number of shares will increase, and the value of each individual will, in turn, decrease because they will represent a smaller percentage of shares.
For example, in a 2:1 stock split, you could own two shares worth $25 instead of 1 share worth $50. In such a case, if, for example, the closing price was $100, the adjusted closing price of each share after the stock split would be $50 each. It is important to underline the fact that value for that particular investor remains the same since they still hold the same amount.
Additionally, a similar situation can take place if a company undergoes the opposite corporate action – a reverse stock split. If a 1:2 reverse stock split takes place, the investor will own only 1 share for every 2 they originally owned. If for example, the closing price was $50 per share, the adjusted closing price would be $100 per share for their remaining 1 share.
Adjusted Closing Price and Dividends
A dividend includes the distribution of some of the profits earned by a company to its shareholders. Once they’ve earned profits, the company will be able to distribute a portion to its shareholders.
Since some of the profits are being given as dividends to shareholders, it can decrease the stock’s value. Therefore, the adjusted closing price, in comparison to the initial closing price, will show the price after distributing dividends to the shareholders.
Importance of the Adjusted Closing Price
The adjusted closing price is important because it gives investors a more current and accurate idea of the stock’s price. It informs investors of any calculations after a corporate action.
1. Adjusted closing price after a stock split
Company XYZ’s shares are valued at $500 each, and the company undergoes a stock split of 2:1. Because of the corporate action, the number of shares will then double, but each individual share will be worth $250. In such a case, the closing price will need to be adjusted to show a more accurate depiction of the stock price after the stock split.
2. Adjusted closing price after a dividend payout
Company ABC’s closing price at the end of the day is $500. Following, the company distributes a $10 dividend per share. The corporate action will affect the closing price, and therefore, an adjusted closing price will be calculated. In such a case, the calculation would be $500 – $10 to equal an adjusted closing price of $490.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: