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Understanding Adjusted Closing Prices

Introduction

A stock's closing price might seem straightforward—the last price at which a stock traded during a particular trading session. However, post-trading hours, stock prices can be affected by various corporate actions, such as stock splits, dividends, new offerings, and mergers. These corporate actions change the stock price significantly, which can mislead the investors. These actions can distort the historical price data and make it challenging to assess a stock's true performance accurately. 

Adjusted Closing Prices are calculated by accounting for these corporate actions to provide a more accurate representation of a stock's historical performance.

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When are Closing Prices Adjusted?

1. Stock Splits:

When a company undergoes a stock split, the number of shares outstanding increases while the price per share decreases. This can create a sudden drop in the stock's price chart, which might mislead investors. For instance, in a 2:1 stock split, every shareholder receives an extra share for each share they hold, effectively halving the stock's price. Without incorporating this adjustment, it might falsely appear as though the stock's value has abruptly plummeted when, in reality, this is not the case.

2. Dividends:

When a stock pays a dividend, its price typically drops by the dividend amount on the ex-dividend date. Adjusted Closing Prices account for these drops, preventing investors from assuming a sudden decline in the stock's value when, in reality, it's just a distribution of earnings.

3. Mergers and Acquisitions:

In cases where two companies merge, their stock prices might change dramatically. Adjusted Closing Prices help smooth out these disruptions.

4. New Offering: 

When a company opts to introduce additional shares of stock, it is termed as a new offering. As the number of individual shares increases, the ownership stake represented by each share diminishes, resulting in a decrease in the overall value of the existing stock. Consequently, even if a stock concludes the trading day at Rs. 100 per share, the presence of newly issued stock might potentially devalue each share to around Rs. 80, contingent on the extent of the new stock offerings. The adjusted closing price, as opposed to the end-of-day cash value of the stock, accommodates the inclusion of these new offerings and the subsequent devaluation of each share.

How to Access Adjusted Closing Prices

For stocks and other securities, they are mentioned on financial websites, trading platforms, and through financial data providers. These prices are often readily available in historical price charts and downloadable datasets.

 Adjusted Closing Prices, Where it is used

Traders and investors rely on historical stock price data to identify trends and patterns.

Adjusted Closing Prices allow them to calculate returns and gauge their investments' success without the distortion caused by corporate actions. They provide a more reliable foundation for measuring volatility and downside risk.

 

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