It is imperative to know the difference between “closing price” and “adjusted closing price” before investing in stocks as both parameters value stocks a bit differently. While closing price merely refers to the cost of shares at the end of the day, the adjusted closing price considers other factors like dividends, stock splits, and new stock offerings. Since the adjusted closing price begins where the closing price ends, it can be called a more accurate measure of stocks’ value.
Here’s a look at how adjusted closing price accounts for dividends, stock splits, and new offerings:
1. Adjusted closing price for dividends
A dividend reduces the value of stocks since it is recognised as capital lost from the company. A dividend is declared when a company rewards its shareholders with additional cash on every share, or by providing an extra percentage of shares. Adjusted closing price refers to the price of the stock after paying off the dividends. For instance, if a stock is priced at Rs. 100 and gives a dividend of INR5 per share, then its adjusted closing price would be Rs. 95.
2. Adjusted for stock splits
Throughout their existence, several companies might choose to split stocks to lower the value per share. They could offer 2 to 1 or 3 to 1 for every stock the shareholder holds. Such a split leads to investors holding twice or thrice as many shares than before the division, but each stock’s value is halved or reduced to 1/3rd its initial price. If the number of these shares increases, the adjusted closing price of every share drops as it would represent a smaller percentage of the entire stock.
3. Impact of new offerings
To raise capital, a company may offer new shares. It may do so in a rights issue by providing the new shares to the existing investors at a reduced price. Similar to stock splits, new offerings lead to a fall in each share price as they own a lesser percentage of the company’s total stock. The adjusted closing price retrospectively falls to account for this value erosion.
Benefits of the adjusted closing price
While looking at closing price vs adjusted closing price, investors must consider the benefits of the adjusted closing price.
– Adjusted closing prices make it extremely easy to carry out a thorough evaluation of the stock prices. Investors can quickly evaluate the value they would accrue out of a particular stock.
– The adjusted closing price acts as a whetting stone for comparing two stock prices since the price accounts for the profitability of value-added stocks and dividends growth. Besides, before investing in long term assets, it is always advisable to compare two asset classes for adjusted closing prices. It tremendously helps in making the right asset allocation.
However, accounting on adjusted prices is often criticised on several grounds too. It is said that the useful information that the nominal closing price can provide is usually destroyed in the process of calculating the adjusted prices. Adjusted closing prices often don’t reflect the recent trends of bulls and bears. Moreover, experts do not recommend valuing speculative assets at adjusted closing prices as several other futuristic factors might impact the stock price. Yet, if used in the right fashion, this technique is immensely helpful.
Have more questions on the adjusted closing price? Reach out to our experts at Angel Broking.