If you're a new investor, you may have heard the terms "closing price" and "adjusted closing price." These two terms refer to slightly different ways of valuing stocks. The closing price of a stock is the price of that stock at the close of the trading day. The adjusted closing price is a more complex analysis that uses the closing price as a starting point, but it takes into account factors such as dividends, stock splits and new stock offerings to determine a value. The adjusted closing price represents a more accurate reflection of a stock's value, since distributions and new offerings can alter the closing price.
Adjusted Closing Price for Dividends
When a stock appreciates, or increases in value, the corporation may 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 because the company is getting rid of some of its value by paying out the dividends.
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 in order to account for the newly reduced value caused by the dividend.
Application to Stock Splits
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 into shares. If the company increases the number of shares, the value of each individual share drops because each individual share now represents a smaller percentage.
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.
Impact of New Offerings
Similar to splitting stocks, a corporation may choose to offer additional shares of stock. New shares are usually issued in order to raise capital for the corporation. The company may issue new shares of stock in a rights offering, in which 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 price drops because the increase in the number of shares makes each individual share worth less, just like with stock splits. The adjusted closing price accounts for the new offerings and the resulting devaluation of each individual stock.
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