When you're deciding whether a stock is a good investment, you often look at its return, meaning the amount of money that people who owned it made in a certain amount of time. If the stock simply went up or down, that calculation isn't too hard since you can just compare daily closing prices over time. However, if the company issued dividends, bought back shares or did something more complex, you can adjust the closing prices to make sure your comparisons are accurate.
Calculating Stock Returns
If you want to figure out how much a stock, a bond or another security returned over a period of time, you'll traditionally compare the closing prices on the first and last day of those periods. Closing prices are effectively the stock's market value at the end of any particular trading day, and you can obtain them through most financial news and information services, through brokerage websites or often through a company's investor relations department or its website.
To compute the stock's return in a period of time in the simple case where the company didn't declare any dividends or undergo other corporate actions, subtract the closing price on the first day of that time period from the closing price on the last day. That gives you a return in dollars, whether it's positive because the stock price went up or negative because it went down.
Using the Adjusted Closing Price
While that basic formula works for companies that haven't split their stock, bought back shares or issued dividends, the market often isn't that simple. If the company has done any of these things on one of the days you're comparing, you'll want to adjust the closing price to make sure you're making an accurate comparison.
For instance, consider a stock currently valued at $150 that closed at $100 one year ago and then announced a dividend of $10 per share. If you didn't take into account the dividend, you'd say that the stock's return over the past year was $50, or 50 percent of its value. However, people who owned it one year ago received that $10 dividend as well as the $50 gain, so their return was actually $60.
One way to capture this gain is to use an adjusted closing price for the value one year ago, subtracting that $10 dividend to get $90 and then subtracting from today's $150 price to get $60.
Adjusted Closing Price Considerations
You can use similar techniques to compute adjusted closing prices after stock splits and buybacks, but it's often easier to look up adjusted closing prices through a financial information service rather than compute them yourself. Either way, once you have the adjusted price, you can subtract from today's price or any later price to find returns per share over time.
