Before you invest in stocks, it is important to understand the differences between "closing prices" and "adjusted close price". Both parameters can affect stocks differently. The closing price is simply the price of shares at the end. However, the adjusted close price takes into account other factors such as dividends and stock splits. The adjusted closing price is a better measure of stock value because it starts at the same place as the closing price.
Here is a look at the adjusted closing price for dividends, stock splits and new offerings.
Dividends reduce the stock's value because they are considered capital loss by the company. When a company pays out additional cash to shareholders or gives away a percentage of shares, a dividend is declared. The stock's closing price after paying dividends is called the adjusted closing price. If a stock is priced at Rs. If a stock is priced at Rs. 100 and pays a dividend of INR5 each share, its adjusted closing price would then be Rs. 95
Many companies may decide to divide stock shares to reduce the share price during their existence. For each stock a shareholder has, they could offer 2 or 3 to 1. This split could result in investors owning twice as many shares or three times more than before the division. However, each stock's initial price is reduced or halved. The adjusted closing price for each share will drop if the stock's number increases as it would make up a smaller portion of the total stock.
A company might offer new shares to raise capital. The company may offer new shares through a rights issue, which provides the shares at a lower price to existing investors. As with stock splits, new offering can cause a drop in share prices as the investors who own less stock of the company experience a decrease in their share price. This value erosion is reflected in the adjusted closing price.
Investors must weigh the advantages of the adjusted closing prices when comparing closing price to adjusted closing price.
- Stock prices can be easily compared to adjusted closing prices. Investors can quickly assess the potential value of a stock.
The adjusted closing price is a guide for comparing stock prices as it accounts for dividend growth and profitability. It is a good idea to compare different asset classes before you invest in long-term assets. This is a great way to make the right asset allocation.
Accounting on adjusted prices is also often criticized for many reasons. The accounting on adjusted prices is often criticized for the loss of useful information such as the nominal closing price. The recent trends of bears and bulls are often not reflected in adjusted closing prices. Experts do not recommend that speculative assets be valued at adjusted closing prices because of the possibility that future factors could impact the stock market. This technique can be extremely helpful if it is used correctly.