The closing price of a stock is exactly that: the price of that stock at the close of the trading day. The adjusted closing price uses the closing price as a starting point, but it takes into account factors such as dividends, stock splits and new stock offerings. The adjusted closing price represents a more accurate reflection of a stock's value, since distributions and new offerings can alter the closing price.
Effect of Dividends
When a stock appreciates in value, the corporation can choose to reward stockholders with a dividend. The dividend can come either in the form of cash paid per share or as an additional percentage of shares. In either event, a dividend reduces the stock's value. The adjusted closing price shows the stock's value after posting a dividend. For example, if a share with a closing price of $100 paid a $5 dividend per share, the adjusted closing price would be $95.
If the price of individual shares in a corporation is too high for investors to purchase in round numbers, the corporation may "split" its stock shares. When the number of shares increases, the value of each individual share drops. In the example above, if the company splits each $100 share into two $50 shares, the adjusted closing price from the day before the split is now $50. The adjustment reflects the stock split, rather than a single-day 50 percent drop in the share price.
A corporation may choose to offer additional shares of stock to raise capital.In a rights offering, the current shareholders are given the option to purchase the new shares at reduced prices. When these new shares enter the market, the price of the existing shares drops. The adjusted closing price accounts for the new offerings and how they change the closing price. The calculations of the adjusted share price on new offerings are not as straightforward as those for other corporate actions.
The primary use for the adjusted closing price is as a means to develop an accurate track record of a stock's performance. The comparison of a stock's historical adjusted closing price to its current price shows the true rate of return. For example, if a stock's current closing share price is $100, and its closing price 10 years ago was $40, the stock shows a 250 percent return over the last decade. However, if the adjusted closing price from a decade ago was $25, the stock shows a true 10-year return rate of 400 percent.
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