Every investor and financial market trader knows that after every trading day on a stock exchange, each stock market tends to have a closing price. The quoted price at the end of the trading day includes the price of the last lot of stock traded for the day. We refer to this as the stock’s closing price. Hence, do you want to know how to calculate this price? We’ve disclosed how you can calculate a stock’s adjusted closing price
Furthermore, investors use the closing price as a reference point to compare a stock’s performance over some time. Meanwhile, you have to note that the closing prices do not often reflect after-hours prices or any corporate actions that might alter the stock’s price from time to time. But they serve as useful markers for investors and traders to evaluate changes in value over time.
Nonetheless, good or bad news associated with a company, or the economy can affect the overall price of any stock during the day. Not all the time, but equally significant to note that any distribution made by the company to shareholders can also affect the stock price. Some of these distributions may include cash dividends, stock splits, and stock dividends.
Carefully read through this page to learn how to calculate a stock’s adjusted closing price yourself. So you can up your stock research skills.
What is the Adjusted Closing Price?
Each matrix in the stock market carries some significance in analyzing some part of the stock. The closing price includes one of these important matrices investors use to learn the market sentiment or deduce its historical returns.
We can consider the closing prices as a vanity metric to measure returns. But, what if the stock price became affected by some event that moved the prices dramatically toward a stock trade closure? The calculated historical returns may not consider the effects of such events and it may or may not also reflect in the next day’s closing price.
Therefore to better accurately calculate the returns during such situations, we consider using the Adjusted Closing Price.
In simple terms, we can describe the Adjusted Closing Price as a price adjustment made in the closing price of a stock. Hence, you can consider the closing price as just a mathematical number calculated using the total trades made in the final 30 minutes before closing the market. It is just a component of cash metrics. Thus, does not alter the effect of any corporate announcement.
How to Calculate a Stock’s Adjusted Closing Price
As earlier mentioned, we often use the adjusted closing price when evaluating historical returns or conducting a detailed analysis of historical returns.
Whenever a company carries out distributions, it becomes simple to calculate the adjusted closing price. For cash dividends (Profits), we divide the value of the dividend from the last closing sale price of the stock.
For instance, let’s speculate that the closing price for one share of ABC Corp. is $30 on Thursday. After the close on Thursday, ABC Corp. announces a dividend distribution of $2.50 per share. The adjusted closing price for the stock will then be $27.50 ($30-$2.50).
However, if ABC Corp. announces a 3:1 stock dividend rather than a cash dividend, the adjusted closing price calculation will change. A 3:1 stock dividend means that for every share an investor owns, he or she will receive three more shares. In this case, the adjusted closing price calculation will be $30*(1 / (3+1)). This will give you a price of $7.50, rounded to the closest penny.
While if ABC Corp. announces a 3:1 stock split, investors will receive an extra share for every share they already own. This time the calculation will be $30*(1 / (1×3)), indicating an adjusted closing price of approximately $10.
What Are The Benefits Of Adjusted Closing Price?
We have elaborated on some advantages of using the Adjusted Closing Price. They include;
#1. Accurate Returns
The major advantage of using an Adjusted Closing Price is to evaluate returns. It seems difficult to interpret the actual returns based on the closing price.
For example, decent companies keep splitting shares, which influences the graph of returns. If a company splits its shares, it doesn’t entail that an investor loses half of his money. In such cases, a difference, hence Adjusted Closing Price is a better metric to measure returns.
#2. Compares against asset classes
Adjusted Closing Price also helps in comparing the returns of long-term investments for two or more asset classes. The closing price doesn’t express the dividend payments, which will decrease the profitability while calculating the returns.
Therefore, if you use the Adjusted Closing Price it will give you a better picture for calculating returns on investment and handling the effects of major events if any.
What Is a Stock Split?
A stock split involves a situation where a company lowers its share price by splitting existing shares into multiple shares. Companies often do this (split stocks) to make share prices/value more affordable for individual investors. Meanwhile, note that a stock split does not affect the market capitalization or the value of all the company’s outstanding shares.
For instance, let’s say a company’s shares sell for $50 and they undergo a 3:1 stock split. You’d use the split ratio, which is 3:1 in this case, to determine the adjusted closing value. You’d divide the $50 share price by 3 and multiply by 1 to get the adjusted closing value. If you owned a $50 share, you would own two $25 shares. The stock’s closing price would be $50, while its adjusted closing price would be $50.
A similar example is when Apple’s closing price on Aug. 28, 2020, was $499.23. Then its stock split was 4:1, but the adjusted closing price for the same date was $124.81.5
FAQs On How to Calculate a Stock’s Adjusted Closing Price
What are the criticisms against Adjusted Closing Price?
The Adjusted Closing Price establishes a wild situation between bulls and bears. In this condition, if the bulls win, the prices will rise high and if the bears win, the losses will become distributed further.
An adjusted closing price may not provide a clear image of the market on the previous day. Thus causing an investor to make a biased investing decision.
Why should you use Adjusted Closing Price for analysis?
You should consider using an Adjusted Closing Price because of its usefulness for long-term and value investors to find out the real returns on the investment. Hence will not be phased by the uneven severe change in the closing prices of the particular stock or asset.
How to calculate returns from Adjusted Closing Price?
When calculating returns from the Adjusted Closing Price, investors should check the reasons that affected the closing price.
For instance, if the dividend affects the stock price, the Adjusted Closing Price you should deduct from the initial buy price. But also add the dividend amount as it also includes a part of the return.
Therefore, you should do an addition or subtraction of the amount while calculating returns after understanding the corporate effect on the closing price.
Conclusion
Finally, you know that to become a better stock analyst, you have to employ different strategies and consider serial many factors. Therefore, you need to learn how how to calculate a stock’s adjusted closing price. You will not regret adding this to your method of analysis to reference stock closing points considering future values.