Figuring out the values of stocks can be more complex than checking their price on any specific day. Stocks have both a "closing price" and an "adjusted closing price." These prices reflect two different ways of determining the value of the stock. The closing price is simply the cash value of that specific piece of stock at day's end while the adjusted closing price reflects the closing price of the stock in relation to other stock attributes. In general, the adjusted closing price is considered to be a more technically accurate reflection of the true value of the stock.
The closing price of a stock is only its cash value at day's end, whereas the adjusted closing price factors in things like dividends, stock splits and new stock offerings.
Adjusted Closing Price and New Offerings
The adjusted closing price analyzes the stock's dividends, stock splits and new stock offerings to determine an adjusted value. The adjusted closing price reflects the change in stock value caused by new offerings from the corporation. New offerings are when a corporation may choose to offer additional shares of stock, which is often done to raise additional money. These new offerings may be offered as a rights offering, where current shareholders have the first right to purchase the shares at reduced prices or the shares may be offered to the public.
New offerings decrease the value of existing stock because when there are more individual shares, each share represents a smaller amount of the total value. This means that although a stock might close at $50 per share, if the company has issued new offerings, each stock might actually only be worth $40, depending on the number of new stocks offered. The adjusted closing price accounts for the new offerings and the resulting devaluation of each individual stock, and not merely the cash value of the stock at the end of the day.
Assessing Stock Splits
When individual stocks become very expensive, companies can split the stocks into smaller units. These splits, like new offerings, reduce the overall value of each share because the number of total shares increases. While the initial overall value of each individual stock decreases with a stock split, the overall value of the company can actually increase because new investors snatch up the newly reduced stocks and drive the price up.
For example, a company with 10,000 shares of $200 stocks might split the shares in half so there are 20,000 shares. Each of the 20,000 shares is then worth $50. When investors buy up the new $50 stocks because of their perceived good value, the value of each of the $50 stocks might then rise. Adjusted closing price accounts for stock splits, both because of a decrease in value caused by the split itself, and also the subsequent possible increase in value due to the new demand.
Understanding the Effect of Dividends
Dividends are payouts that a company can distribute to shareholders when stocks and profits are appreciating. A company might pay out a dividend as an award of additional shares to a stockholder or as a cash return. While dividends are good for stockholders, they actually decrease the value of each company stock.
The decrease is caused by the fact that paying out dividends reduces the value of the company because they are transferring money or stocks into the hands of shareholders instead of investing it back into the company. Unlike closing price, adjusted closing price reflects devaluation caused by dividend disbursement.
Overall, the adjusted closing price will give you a better idea of the overall value of the stock and help you make informed decisions about buying and selling, while the closing stock price will tell you the exact cash value of a share of stock at the end of the trading day.
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