Stock exchanges witness buying and selling of millions of shares every minute. When the exchanges close, the last trading price of the stock is recorded as the closing price of the share. However, does the closing price reflect all the incidents of the past? Stock market investing is based on ascertaining the right value of a stock. Investors often analyze if a stock is undervalued or overvalued. If the closing price doesn’t reflect all the corporate actions of the past, analyzing a stock becomes a bit difficult. The adjusted closing price is considered instead of the closing price when the historical performance has to be analyzed.
What is the adjusted closing price?
When a closing price is declared at the end of the trading session, why is the adjusted closing price needed? What is the adjusted closing price? A number of corporate actions like a stock split, dividend payout or rights issue affect the actual price of the stock but are not reflected in the daily closing price. The daily closing price tells only about the cash component of a stock. It is the price at which the last lot of the stock is bought or sold in the last trading session. The adjusted closing price takes into account all the factors that may have affected the stock price after the market hours. The adjusted closing price is a better tool to analyze the historical returns of a stock. To understand what is adj close in the stock market, it is important to get an idea of how corporate actions affect the closing price.
Impact of corporate action on the closing price
Common corporate actions like stock splits and dividend payout have an impact on the closing price. Companies often opt for a stock split to make the shares affordable for retail investors. If a company performs well and the share price increases consistently, the price of each share may reach a level to make it unaffordable for common investors. A stock split simply divides each share into multiple ones, reducing the price of each. Stock splits do not affect the market capitalization of the company but increase the number of shares outstanding. For instance, a company announces a one-to-five stock split. If the closing price before the split was Rs 500 per share, it will be reduced to Rs 100 per share to maintain consistency. Similarly, all the closing prices of the past will be divided by five to get the adjusted closing price.
Dividends and bonus issues
Companies often reward shareholders through dividends and bonus issues. Both dividends and bonus issues have an impact on the closing price. In case of a dividend payout, shareholders are paid a specific amount per share. For example, if a company declares a dividend of Rs 5 per share and the prevailing share price is Rs 100. After the payout, the adjusted closing price will; be Rs 95 as the dividend amount is deducted from the company’s assets. In the case of bonus issues, the closing price is reduced in the same proportion as the bonus issue. All the pats closing prices are adjusted accordingly.
The impact of rights issues too is not reflected in the closing price. In a rights issue, existing shareholders get the option to subscribe to additional shares at a discounted price. Rights issues dilute the value of the shares as the new shares are added at a lower price. After a rights issue, the adjusting factor is taken into consideration to get the adjusted closing price.
The adjusted close price is an important tool for investors, especially long-term and value investors. It helps in getting an idea of the fair value of a stock. For instance, stock splits only reduce the closing price and do not have any impact on the overall value of a company. All successful companies have multiple stock splits and hence without an adjusted close price, investors may not be able to get the right picture. Stock splits also make it easier to make a like-to-like comparison.