What is the adjusted closing price?
– Definition: The adjusted closing price is a historical closing price that has been modified to reflect corporate actions (stock splits, dividends, rights offerings, etc.) so the series shows the true economic return to a shareholder over time. It differs from the raw closing price, which is simply the last traded price when the market closed that day.
Why it matters (short summary)
– Use adjusted closes when you want to measure historical returns, total shareholder gain, or compare long-term performance across securities. Without adjustment, events like splits and dividends can make a stock’s price history misleading.
Key terms (defined)
– Closing price: last traded price before market close.
– Corporate action: any company event that changes share count or cash value to shareholders (e.g., split, dividend, rights offering).
– Stock split: increases shares outstanding while reducing price per share proportionally (market cap unchanged).
– Cash dividend: a cash payout per share that reduces company assets and, all else equal, lowers the share price by about the dividend amount on the ex-dividend date.
– Rights offering: existing shareholders get the right to buy additional shares at a set subscription price; this typically dilutes existing share value.
Types of adjustments and how to apply them
1) Stock splits (or reverse splits)
– What to do: scale past prices and prior volume by the split factor so pre-split numbers match the new per-share basis.
– Rule: Adjusted price = historical price ÷ split factor (for a forward split).
– Example: 3-for-1 split. Yesterday’s close = $300. Adjusted prior close = $300 ÷ 3 = $100.
2) Cash dividends
– What to do: subtract the cash dividend from prior prices so returns reflect the cash returned to shareholders.
– Rule (simple approach): Adjusted prior price = historical price − dividend per share.
– Example: Dividend = $1. Before dividend the stock traded at $51. After paying $1 the theoretical price = $50. To compute returns, previous prices are reduced by $1.
3) Rights offerings
– What to do: compute the theoretical ex-rights price (TERP) using the weighted average of old and new shares; adjust previous prices using the factor implied by the rights issue.
– Formula (one common form): TERP = (N × P + M × S) ÷ (N + M)
– N = number of existing shares used in the example period (or ratio base)
– P = market price before rights
– M = number of new shares available under the rights
– S = subscription price for the new shares
– Example (worked): Company offers 1 new share for every 2 held (M = 1, N = 2). Pre-rights price P = $50, subscription S = $45.
– TERP = (2×50 + 1×45) ÷ (2+1) = (100 + 45) ÷ 3 = 145 ÷ 3 = $48.33.
– So the adjusted price after the rights issue is ~ $48.33 per share.
Step-by-step checklist for adjusting a historical price series
1. Gather a list of corporate actions and dates (splits, dividends, rights issues). Use official company announcements or a reliable data provider.
2. Work backward from the most recent price:
– For a split on date t with factor F (e.g., 3-for-1 → F = 3): divide all prior prices and prior volumes by F.
– For a cash dividend of D on date t: subtract D from all prior prices (or apply the provider’s cash-adjustment method).
– For a rights offering: compute TERP and apply the ratio-based adjustment to prior values.
3. Apply adjustments cumulatively in reverse chronological order if multiple events occurred.
4. Verify the final adjusted series reproduces known total-return outcomes (e.g., buy-and-hold with reinvested dividends if that is the intended interpretation).
5. Document assumptions (taxes, reinvestment policy, fees) because adjusted-price methods vary across providers.
Worked numeric examples (compact)
– Split: 3-for-1 split. Yesterday close $300 → adjusted = $300 ÷ 3 = $100.
– Dividend: $1 dividend. Pre-dividend price $51 → theoretical ex-dividend $50. To compute total return, add the $1 to cash returns or subtract $1 from prior price when creating the adjusted series.
– Rights offering: 1 for 2 at $45 with market price $50 → TERP = (2×50 + 1×45)/3 = $48.33.
Benefits of using adjusted closing prices
– Accurately measures total historical returns that include cash paid and dilution effects.
– Makes long-term charts and comparisons meaningful when companies have split shares repeatedly or paid significant dividends.
– Useful for backtesting strategies that rely on economic returns rather than nominal price levels.
Common criticisms and limitations
– Adjusted prices hide nominal price levels that can be important for short-term traders who watch round numbers (e.g., orders at $100) or interest in contemporary price headlines.
– Different data vendors may apply different adjustment methods (e.g., total-return vs. split-and-dividend-only), so always check the vendor’s methodology.
– Adjusted prices do not account for taxes, transaction costs, or dividend reinvestment policies unless explicitly modeled.
When to use adjusted close vs. raw close
– Use adjusted close: computing historical returns, portfolio backtests that include dividends, long-term performance comparisons.
– Use raw close: analyzing intraday price levels, technical support/resistance based on nominal past prices, or interpreting contemporaneous news mentioning nominal levels.
Sources for further reading
– Investopedia — Adjusted Closing Price: https://www.investopedia.com/terms/a/adjusted_closing_price.asp
– U.S. Securities and Exchange Commission (SEC) — Fast Answers: Stock Splits: https://www.sec.gov/fast-answers/answersstocksplitshtm.html
– U.S. Securities and Exchange Commission (SEC) — Fast Answers: Dividends: https://www.sec.gov/fast-answers/answersdividendshtm.html
– Yahoo Finance Help — What “Adjusted Close” Means: https://help.yahoo.com/kb/SLN2310.html
Educational disclaimer
This explainer is for educational purposes only. It does not constitute investment advice, and it does not recommend buying or selling securities. Always confirm methodologies with your data provider and consider consulting a licensed financial professional for personal guidance.