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How is the Adjusted Closing Price Different from the Closing Price

15 Sep 2023

In the Indian stock market, the closing price is the last traded price of a stock at the end of a trading session. It serves as a snapshot of a stock's value at that specific moment. The closing price is significant for various market participants. Long-term investors use it as a reference point to track a stock's historical performance. For short-term traders, it aids in decision-making.

What is The Role of Adjusted Closing Price?

The adjusted closing price is a modified version of the closing price, accounting for corporate actions and events that affect a stock's value. Corporate actions such as stock splits, dividends, and rights issues can impact a stock's price significantly. The adjusted closing price adjusts for these events to provide a more accurate picture.

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Why is Adjusted Closing Price Important?

Adjusted closing price ensures that historical stock prices are comparable over time, even when there have been corporate actions. This is crucial for investors and analysts to perform meaningful analysis.

​Calculating the Adjusted Closing Price

  • For Stock Splits:

In the case of stock splits, the adjusted closing price is recalculated by dividing the closing price by the split ratio. For example, the adjusted closing price would be half the closing price in a 2-for-1 stock split.

  • For Dividends:

When a stock pays dividends, the adjusted closing price is adjusted downward to reflect the dividend payment. This prevents an artificial drop in the stock's price due to dividend distribution.

  • For Rights Issues:

Rights issues can dilute the value of existing shares. The adjusted closing price accounts for this dilution by adjusting the price downward.

Why the Difference Matters?

  • ​Investment Analysis:

When analysing a stock's historical performance, using the adjusted closing price is crucial. Without adjustments, it would appear that the stock's value dropped significantly due to corporate actions.

  • Portfolio Valuation:

For portfolio managers and investors, accurate valuation is essential. The adjusted closing price ensures that the portfolio's value accurately reflects the impact of corporate events.

  • Risk Management:

Using adjusted closing prices allows for a more precise assessment of investment risks. It helps investors make informed decisions and avoid potential pitfalls.

Conclusion

In the Indian stock market, both the closing price and adjusted closing price have their roles. The closing price provides a snapshot of a stock's value at the end of a trading session. And the adjusted closing price accounts for corporate actions, ensuring the accuracy of historical data. Understanding the difference between these two metrics is crucial for making informed decisions.

 

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