What is the Adjusted Closing Price?
Each matrix in the stock market holds some importance in analyzing some part of the stock. The closing price is one of these important matrices used to understand the market sentiment or determine its historical returns.
The closing prices are a vanity metric to measure returns. But, what if the stock price is affected by some event that moves the prices dramatically?
The historical returns calculated by closing prices would not consider the effects of such events and it may or may not also reflect in the next day’s closing price. For better accuracy in calculating returns during such situations, the Adjusted Closing Price is used.
About Adjusted Closing Price
In simple terms, the Adjusted Closing Price is a price adjustment made in the closing price of a stock. A closing price is just a mathematical number derived using the total trades made in the final 30 minutes before closing the market. It is just a cash component and does not amend the effect of any corporate announcements.
Due to the aforesaid reason, the stock can’t be valued with proper accuracy. Therefore the Adjusted Closing Price was introduced. Generally, corporate announcements are made post-market hours, and their effects are not reflected on the closing price. Such announcements include splitting shares, dividends or the issue of right shares.
The adjusted price is derived post-application of these effects in the closing price as per the market behaviour. The Adjusted Closing Price is a complex calculation, as it includes one more factor to the calculation and aims for better accuracy of returns.
How is the Adjusted Closing Price calculated?
The calculation of Adjusted Closing Price for splits, dividends or right issues differentiates from each other and have a varying effect.
In the case of dividends, suppose ABC ltd. announces a dividend of Rs. 2 per share and is being traded at Rs. 200, the Adjusted Closing Price would be Rs. 198.
When the stocks are split, the Adjusted Closing Price either declines or rises drastically. Suppose a company decides to split its stock in a 2:1 ratio, and the stock price is being traded at Rs. 100, the new Adjusted Closing Price will now be Rs. 50 and the total number of outstanding shares will double in the market with the same market capitalization. If the right shares are offered, the supply in the market is diluted. Due to this reason, the Adjusted Closing Price will be declined.
What are the benefits of Adjusted Closing Price?
The advantages of using the Adjusted Closing Price include:
Accurate Returns
The foremost benefit of Adjusted Closing Price is to calculate returns. It is hard to interpret the actual returns based on the closing price. For instance, good companies keep splitting shares, which affects the graph of returns. If a company splits its shares, that doesn’t mean that an investor loses half of his money. At such nuances, Adjusted Closing Price is a better metric to calculate returns.
Compares against asset classes
The second benefit of Adjusted Closing Price is that it helps in comparing the returns of long term investments for two or more asset classes. The closing price doesn’t account for dividend payments, which will reduce the profitability while calculating the returns.
Thus, the Adjusted Closing Price gives a better picture for calculating returns on investment and handles the effects of major events if any.
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Frequently Asked Questions
While calculating returns from Adjusted Closing Price, an investor should check the reason for which the closing price has been affected.
For example, if the dividend is affecting the stock price, Adjusted Closing Price should be deducted from the initial buy price, but add the dividend amount as it is also a part of the return.
Thus, addition or subtraction of amount while calculating returns should be done after understanding the corporate effect on the closing price.
The Adjusted Closing Price creates a heated situation between bulls and bears. If the bulls win, the prices will soar high and if the bears win, the losses will be spread further.
Adjusted Closing Price may not give a clear picture of the market on the previous day and an investor may make a biased investing decision.
Adjusted Closing Price is useful for long term and value investors to find out the real returns on the investment and not be phased by the uneven drastic change in the closing prices of the particular stock or asset.