Stock exchanges are witness to the buying and selling millions of shares each minute. The closing price of a share is determined by the last trading price at the close of each exchange. But does the closing price reflect all past events? Stock market investing focuses on determining the correct value of a stock. Investors will often analyze a stock to determine if it is overvalued or undervalued. Analyzing a stock can be difficult if the closing price does not reflect all corporate actions in the past. When analysing historical performance, the adjusted closing price will be used instead of the closing prices.
Why is an adjusted closing price required when a closing price has been declared at the close of a trading session? What is the adjusted close price? A variety of corporate actions, such as a stock split or dividend payout, can affect the stock's actual price but they are not included in the daily closing prices. The cash portion of a stock is not included in the daily closing price. This is the closing price at which the stock's last lot was bought or sold during the previous trading session. The adjusted closing price considers all factors that could have affected stock prices after market hours. The adjusted closing price provides a better way to analyze the historical returns of stock. It is essential to understand how corporate actions impact the closing price in order to determine what adj close is in the stock exchange.
Common corporate actions such as stock splitting or dividend payout can have an effect on the closing price. Stock splits are often arranged by companies to make shares more affordable for retail investors. If a company is performing well, and the share price rises consistently, then the price of each share could become prohibitive for common investors. Stock splits simply allow each share to be divided into multiple shares, which reduces their price. Stock splits don't affect the company's market capitalisation, but they increase the number of shares in issue. A company might announce a one-to-5 stock split. To maintain consistency, if the closing price was Rs 500 per shares before the split, it will be decreased to Rs 100 per share. To get the adjusted closing cost, all closing prices from the past will be divided five times.
Many companies reward shareholders with bonus and dividends. Both bonus issues and dividends have an effect on the closing price. Dividend payouts pay shareholders a fixed amount per share. If a company declares Rs 5 per share, and the current share price is Rs 100, then that's an example of a dividend. The adjusted closing price after the payout will be Rs 95, as the dividend amount has been deducted from the company’s assets. Bonus issues have their closing price reduced by the same amount as the bonus issue. All closing prices for pats are adjusted accordingly.
The closing price does not reflect the impact of rights issues. Existing shareholders have the option to purchase additional shares at a reduced price through a rights issue. The new shares purchased at a lower price can cause rights issues to dilute the share's value. The adjusted closing price is determined after a rights issue.
Investors, particularly value and long-term investors, should use the adjusted close price as a tool. This helps to determine the fair market value of a stock. Stock splits, for example, reduce the closing price but have no effect on the company's overall value. Multiple stock splits are a hallmark of any successful company. Investors may not be able see the whole picture if there is no adjusted close price. It is also easier to compare like-to-like stock splits.