Adjusted Closing Price vs Closing Price: The price of the shares is one of the important metrics for individuals in the stock market. It helps the individuals interpret the demand and supply for stock and helps them get a sense of the broader economic environment and recent news events that have an effect on the price of the company.
Stock prices can also help individuals determine how well the stock is performing and whether it is likely to perform well in the future. But these price representations can be impacted due to some corporate actions that take place in the company
The terms closing price and adjusted closing price are frequently used when discussing how to track a stock’s performance. Though these terms might appear identical, they have different implications and provide different information to investors.
In this article, we will be discussing the adjusted closing price vs closing price of the company.
Adjusted Closing Price Vs Closing Price
Let’s explore the differences between the Adjusted Closing Price and Closing Price.
What Is Closing Price?
The closing price of a stock is the last price at which the stock is traded for the day. It is the last traded price for a given stock on a given day.
What Is Adjusted Closing Price?
The closing price on the other hand is modified to reflect company actions including stock splits, dividends, and new offerings. This ensures that the price of the stock is adjusted to represent the actual value of the stock after the corporate action has taken place.
Now that we covered the meaning of closing price and adjusted closing price, it is now easier to understand Adjusted Closing Price vs Closing Price. While the closing price only relates to the cost of shares at the end of the day, the adjusted closing price takes into account things like dividends, stock splits, and new stock offerings.
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Types Of Adjusted Closing Price
The following are the categories of the Adjusted Closing Price, Continue reading.
Adjusted Closing Price For Stock Splits
A stock split is a corporate action where a company issues more number shares to its current shareholders at a specified ratio by lowering the face value of each share.
This implies that the number of existing shares is divided in order to increase the number of shares of the company and make the shares more affordable. The stock split will not have an impact on the market capitalization of the company as the prices are adjusted according to the stock split.
For example, the board of directors of the company decides to split the shares of the company in the ratio of 1:2. This means that the shares of the company will multiply into two and the price of the shares will be divided by two in order to adjust for the split.
Suppose a stock has closed at the price of Rs. 200 a day before the stock split. On the day of the split, the share price would be adjusted to Rs 100 per share which will maintain consistency in the Market capitalization.
Even the previous closing prices of the company would be divided by two in order to obtain the adjusted closing prices throughout the history of the stock.
The Adjusted Closing Price For Dividends
A dividend is a share of profits and retained earnings that a company pays out to its shareholders and owners. When a company generates profit and builds up retained earnings, it can either choose to reinvest those funds back into the company or distribute them as a dividend.
Dividends are part of a company’s profit that is paid out to its owners and shareholders. Although dividends are beneficial to shareholders, they also lower the stock price of the company
The reason for the adjustment in the stock price is due to the fact that dividends reduce the value of the firm as it transfers money to its shareholders which could rather be reinvested towards the growth of the company. Here the adjusted closing price accounts for the amount of dividend the company has paid out per share.
For example, if Company XYZ’s closing price is Rs 1000 at the end of the day and the company distributes a dividend of Rs 30 the following day.
Since this Rs 30 is no longer a part of the company’s assets and is now a part of investors returns, the dividend paid is subtracted from the share price. Thus, the adjusted closing price will be Rs 970 (Rs.1000-Rs30)
Through this, we will obtain the company’s adjusted closing price, which will give a better picture of the company’s return. The adjusted closing price in this case will only be calculated for the day the dividend has been paid out by the company.
The Adjusted Closing Price For The Rights Issue
A Rights issue is a corporate action where the company tries to raise additional funds for the company by offering additional shares at a discount to the existing shareholders of the company. Since the additional shares are offered at a discount to the existing shareholders, the average price of the shares changes resulting in an adjusted closing price.
Example Of Adjusted Closing Price For Rights Issue
Let us assume Company XYZ ltd has a total of 10000 shares with a market capitalization of Rs 210000. If the company comes out with a rights issue in the ratio of 2:10 at a discounted price of Rs. 15. The adjusted closing price will be as per the calculations down below:
- New shares available during the rights issue= (10000 x 2/10) i.e. ( shares held x ratio offered) = 2000 shares.
- Total Price of the Rights Issue= 2000 shares x Rs. 15= Rs 30000
- Total shares after right issue= 10000 + 2000 = 12000 shares.
- New Market Capitalization after rights issue= 210000+30000 = Rs. 240000
- There the adjusted closing price= 240000/12000 = Rs. 20 per share
Also Read: Can We Do Intraday Trading in US Market From India?
In this article, we discussed the meaning of closing price, adjusted closing price, briefly covered Adjusted Closing Price vs Closing Price, and adjusted closing price for different corporate actions.
It should be noted that both the closing price and the adjusted closing price are important metrics of a depicted stock. Despite their apparent similarity, they have diverse implications and provide individuals with different information. For making knowledgeable financial decisions, it is essential to understand the distinctions between these two terms.
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