Adjusted Closing Price, Definition and Uses
Each day a stock trades it has a closing price–the price at which the last share lot (100 shares) traded before the market closed. For stocks in the US, it is usually the price of the transaction that occurs at 4 PM EST. The closing price is the raw price–the actual transaction price–and doesn’t account for company actions such as dividends or stock splits.
The Adjusted Closing Price is preferred by some traders to the raw closing price, because it accounts for corporate actions. Assume a stock closes at $20 one day, but then the stocks is split 2:1. For every one share investors own they will now have two. The value of the stock doesn’t change though–before you had one share worth $20, now you have two shares worth $10.
If you view a closing price chart it will look like the stock had a big move from $20 to $10 in one day. If you view an adjusted chart, it will divide all closing price by 2, thus showing that there was no actual change in the value to investors.
The same concept applies to a reverse stock split, such as 1:2. For ever two shares investors own they will now have one. The value of the stock doesn’t change; if it was trading at $10, the adjusted closing price is $20. Before you had 100 shares worth $10 each. Now you have half the shares but they are worth twice as much.
The adjusted closing price also factors for dividends. When a company declares a dividend, the dividend amount is subtracted from the closing price on adjusted closing price charts. The raw closing price doesn’t make this adjustment. For example, assume a stock has a closing price of $10, and overnight the company declares a $0.30 dividend per share. The dividend amount will be subtracted from $10, making the adjusted close $9.70 instead of $10. Yahoo! Finance shows both the closing price and adjusted closing price if you click on “Historical Prices” while viewing a stock quote.
The chart below shows the price history of the SPDR S&P 500 (SPY). Notice how all days before the dividend are adjusted by the dividend amount. Rounding errors may sometimes occur.
Financial sites and charting platforms typically let you choose between closing prices or adjusted closing prices.
To Use Closing Price or Adjusted Closing Price
One method is not necessarily better than the other, they just provide different information. If there has been a stock split on the time frame you are viewing then using adjusted closing prices will make the chart look more uniform, without a massive gap occurring between pre- and post-stock split. If you are a technical trader, focusing on price patterns on the chart, then you’ll typically want to use adjusted closing prices when viewing a stock with a split.
Whether to use adjusted closing prices when a dividend is involved is a more personal choice. Technical traders may wish to avoid using adjusted closing prices because adjusted prices may obscure technical breakout levels. For example, assume a price has repeatedly reached $10, but can’t move above it. The company declares a $0.15 dividend, which means historical prices are dropped by $0.15. $10 is still an important level, but your adjusted price charts may obscure it since historical prices have been changed.
For investors buying dividend paying stocks an adjusted closing price chart can highlight whether a stock is continuing to rise even while accounting for dividend distributions. From the example above, if a stock has struggled to move above $10, but finally does, on an adjusted closing price basis, it shows the stock is still rising to new highs even though dividends have been deducted from the price–this is a positive sign as long as it continues to occur.