The original closing or final price is the price of the stock or any other security at the time when the securities market closes. Adjusted closing price is calculated by adjusting the original price to reflect the effect of factors that cause the price to shift after closing the securities market. Some of these factors are dividend payout, stock splits and bonus stock.
Why consider this adjusted closing price?
You as an investor cannot make an informed decision based on the security’s closing price after the factors that alter it have occurred. The closing price on the stock market today will no longer match the stock price tomorrow after the effect of corporate actions.
Adjusted closing price considers the changes in the value of security after the market has closed. This is a more accurate representation of the value of that security.
Factors taken into consideration while adjusting closing price
- Effect of dividend payout
Once a cash dividend is announced, shareholders receive a certain amount of money. Thus, dividends are reduced from the closing price as the company no longer retains the amount distributed. Hence, it is crucial to calculate the adjusted closing price of stock once a dividend is announced.
- Effect of bonus issues or stock split
Both bonus issues and stock split have the same effect on the adjusted closing price of shares. Essentially, in both cases, the number of shares per shareholder increases. Shareholders now have more shares with them for the same investment.
Therefore, the price per share of the investor decreases. For instance, consider these simple examples:
- Bonus issue: A shareholder has 5 shares that were closed at Rs. 60 each. The company announced a bonus issue of 1 share per 5 shares. Now the adjusted closing price will be Rs. (60×5)/6, i.e., Rs. 50
- Stock split: A shareholder has 5 shares that were closed at Rs. 60 each. The company announced a stock split of 2:1. Now the adjusted closing price will be Rs. 60/2, i.e., Rs. 30
- Effect of reverse stock split
In case of a reverse stock split, the shares are combined. Therefore, the number of shares per shareholder reduces. In such cases, the adjusted closing price of the shares is the sum of the number of shares combined.
Adjusted closing price and its importance while investing
As an investor, it is important to know that such a calculation is generally relevant only on the announcement date. As the stock market adapts to the information available, it automatically adjusts the price on the next day(s). The adjusted closing price is more accurate, current and relevant for an investor as it considers factors not considered in the original closing price.
It is, therefore, necessary to understand the concept of adjusted closing prices while investing in stocks.
