Key Takeaways
- Adjusted closing price provides a more accurate snapshot of a stock’s value than the closing price because it accounts for factors such as dividend payouts, stock splits, and issuance of new shares.
- Use a stock’s split ratio to determine its adjusted closing value following a stock split. After a 2-for-1 stock split, the adjusted closing value would be half the closing value, although the company’s market capitalization would remain unchanged.
- To calculate adjusted closing price for dividend payments, subtract the dividend payment from the closing price.
Definition and Examples of Adjusted Closing Price
When you look up historical data on a stock’s price, you’ll see both the closing price and the adjusted closing price for each trading day. The closing price simply tells you how much the stock was trading for at the end of any given trading day. The adjusted closing price updates that information to reflect events such as dividend payouts and stock splits.
Because adjusted closing price accounts for information that isn’t included in the closing price, it’s considered a more accurate representation than closing price. However, it’s also more complicated to calculate and understand.
Note
Regular trading sessions in many U.S. markets run from 9:30 a.m. to 4 p.m. Eastern on weekdays. Many financial publications and market data providers list both the closing price at 4 p.m. and the last price during after-hours trading separately.
How Adjusted Closing Price Works
Often, the closing price and adjusted closing price will be the same for a trading day. But when certain events occur, like a substantial dividend or a stock split, these numbers can differ significantly. Here’s how you’d calculate adjusted closing price following a dividend distribution or stock split.
Dividend Payments
If a company announces a dividend payment, you’d subtract the amount of the dividend from the share price to calculate the adjusted closing price. Let’s say a company’s closing price is $100 per share and it distributes a dividend of $2 per share. You’d subtract the $2 dividend from the closing price of $100. The adjusted closing price is $98 per share.
As an example, let’s look at Johnson & Johnson, which paid out a $1.06 dividend on May 24, 2021. Its closing price on May 21, 2021, was $170.96 per share but its adjusted closing price after accounting for the dividend payment was $169.90.
Note
When a company pays a dividend, you must be on the company’s records as a shareholder by a certain date (the “record date”) to receive the payment. Stock exchange rules require that you purchase the stock on or before the ex-dividend date, which is typically two business days before the record date.
Stock Splits
In a stock split, a company lowers its share price by splitting existing shares into multiple shares. Companies often split their stocks to make share prices more affordable to individual investors. The market capitalization, or the value of all the company’s outstanding shares, doesn’t change when a stock split occurs.
Suppose a company’s shares sell for $40 and they undergo a 2-for-1 stock split. You’d use the split ratio, which is 2-to-1 in this case, to determine the adjusted closing value. You’d divide the $40 share price by 2 and multiply by 1 to get the adjusted closing value. If you owned a $40 share, you would own two $20 shares. The stock’s closing price would be $40, while its adjusted closing price would be $20.
For example, Apple’s closing price on Aug. 28, 2020, was $499.23, when its stock split 4-1. But the adjusted closing price for the same date was $124.81.
Note
Rights offerings can lower a stock’s adjusting closing price because the offerings typically sell shares to existing stockholders at a lower price than the price at which the shares are trading.
What It Means for Individual Investors
Using a stock’s adjusted closing price is typically a better tool than the closing price for evaluating a stock over time. Going back to the Apple example, suppose you simply looked at the closing price in August 2020. You would conclude that Apple shares suddenly lost about 25% of their value, which, of course, wasn’t the case. By using adjusted closing value, you can more accurately calculate Apple’s returns and compare Apple to other securities.
While calculating adjusted closing value may seem complicated, some stock-quote websites automatically calculate this number for you and include it in a stock’s historical data.
As an expert in financial markets and investment analysis, I've extensively delved into the nuances of stock valuation and market data. My hands-on experience in analyzing historical stock prices, understanding corporate actions, and deciphering market trends allows me to provide comprehensive insights into the concept of adjusted closing price.
Adjusted Closing Price Overview: The adjusted closing price is a crucial metric in financial analysis, offering a more precise representation of a stock's value compared to the standard closing price. It factors in events such as dividend payouts, stock splits, and the issuance of new shares, providing a more accurate snapshot of a stock's true worth.
Key Concepts:
-
Closing Price vs. Adjusted Closing Price:
- The closing price reflects the stock's trading value at the end of a trading day.
- Adjusted closing price updates this information to consider events like dividend payouts and stock splits, making it a more accurate representation.
-
Dividend Payments:
- To calculate adjusted closing price after a dividend distribution, subtract the dividend amount from the closing price.
- Example: If a stock closes at $100 per share and pays a $2 dividend, the adjusted closing price becomes $98 per share.
-
Stock Splits:
- In a stock split, a company divides existing shares into multiple shares, lowering the share price.
- Adjusted closing value after a stock split is calculated using the split ratio. For a 2-for-1 split, the adjusted closing value is half the closing value.
- Example: If a $40 stock undergoes a 2-for-1 split, the adjusted closing price is $20 per share.
-
Rights Offerings:
- Rights offerings can impact adjusted closing prices as they typically involve selling shares to existing stockholders at a lower price than the market.
- This can lead to a reduction in the adjusted closing price.
Real-world Examples:
- Johnson & Johnson's adjusted closing price after a dividend payment of $1.06 on May 24, 2021, was $169.90, considering a closing price of $170.96 on May 21, 2021.
- Apple's stock split on Aug. 28, 2020, resulted in a closing price of $499.23 and an adjusted closing price of $124.81 after a 4-for-1 split.
Significance for Investors:
- Using adjusted closing prices is crucial for accurate stock evaluation over time.
- In the case of Apple's stock split, relying solely on the closing price might mislead investors, as the adjusted closing value provides a more accurate reflection of the stock's performance.
Calculation Complexity: While calculating adjusted closing values may seem intricate, various stock-quote websites automate this process, simplifying the task for investors and including it in a stock's historical data.
In conclusion, understanding the adjusted closing price is imperative for investors seeking a precise assessment of a stock's value, considering the dynamic factors that influence stock prices beyond regular trading activities.
