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Understanding the nuances between adjusted closing price and closing price helps in understanding stock metrics and conducting broader stock analysis.
In the realm of stock market analysis, two terms frequently surface: closing price and adjusted closing price. While they might seem similar, they serve distinct purposes and offer different insights into a stock's performance. This article delves into the differences between these two metrics, elucidating their significance and applications in financial analysis.
The closing price is the last price at which a stock is traded during regular trading hours on a given day. It serves as a benchmark for investors to assess daily stock performance and is widely used in financial reporting and analysis.
In Indian stock exchanges like NSE and BSE, the closing price is calculated as the weighted average of prices in the last 30 minutes of trading. This method ensures a fair representation of the stock's value at market close.
Adjusted closing price revises the closing price to reflect the effects of corporate actions—including dividends, stock splits, and rights offerings—providing a more consistent basis for historical analysis. This adjustment helps in analysing historical performance and making consistent comparisons over different periods.
Dividends: Cash dividends reduce a company's assets, leading to a decrease in stock price. The adjusted closing price accounts for this by subtracting the dividend amount.
Stock Splits: In a stock split, the number of shares increases while the price per share decreases proportionally. Adjusted closing price recalculates historical prices to maintain consistency.
Rights Offerings: When companies offer additional shares to existing shareholders at a discount, it can dilute the stock's value. Adjusted closing price factors in this dilution for accurate historical analysis.
Understanding the distinctions between these two metrics is vital for accurate stock evaluation.
Aspect |
Closing Price |
Adjusted Closing Price |
|---|---|---|
Definition |
Final trading price on a given day |
Closing price adjusted for corporate actions |
Reflects Dividends |
No |
Yes |
Accounts for Splits |
No |
Yes |
Historical Accuracy |
Limited |
High |
Use in Analysis |
Daily performance tracking |
Long-term performance and trend analysis |
Calculating the adjusted closing price involves accounting for various corporate actions.
Adjusted Closing Price = Closing Price × Adjustment Factor
The adjustment factor is determined based on the type and magnitude of corporate actions. For instance, in a 2-for-1 stock split, the adjustment factor would be 0.5.
If a stock closes at ₹100 and issues a ₹5 dividend, the adjusted closing price would be:
Adjusted Closing Price = ₹100 - ₹5 = ₹95
Note: The method of adjustment depends on the type of corporate action. For dividends, the amount may be subtracted. For stock splits or bonuses, prices may be adjusted proportionally.
The adjusted closing price offers a more accurate representation of a stock's value, especially for long-term analysis.
Accurate Historical Analysis: By accounting for corporate actions, it offers a consistent basis for analysing historical performance.
Better Comparison: Enables meaningful comparisons between different time periods and stocks.
Informed Decision-Making: Offers data that is adjusted for corporate actions for reference in historical analysis.
While the closing price offers a snapshot of a stock's performance on a particular day, the adjusted closing price provides a more comprehensive view by incorporating the effects of corporate actions. For investors looking to interpret long-term price trends with historical adjustments, understanding and utilising the adjusted closing price is used in historical data analysis, particularly over extended timeframes.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
1. Investopedia - https://www.investopedia.com/terms/a/adjusted_closing_price.asp
2. Corporate Finance Institute - https://corporatefinanceinstitute.com/resources/equities/adjusted-closing-price/
3. Angel One - https://www.angelone.in/knowledge-center/sharmarket/difference-between-closing-price-and-adjusted-closing-price
4. EODHD - https://eodhd.com/financial-academy/financial-faq/adjusted-close-and-close-whats-the-difference
The closing price is the last trading price of a stock on a given day, while the adjusted closing price accounts for corporate actions like dividends and stock splits to provide a more accurate historical value.
It offers a true reflection of a stock's value over time, helping users understand how a stock's historical prices have been impacted by corporate actions.
Adjusted closing prices are updated whenever a corporate action affecting the stock's value occurs.
While the closing price provides daily performance insights, relying solely on it may not reflect the effects of corporate actions on the historical pricing data. For long-term analysis, the adjusted closing price is more informative.
