JGI/Tom Grill / Getty Images Because adjusted closing price accounts for information that isn’t included in the closing price, it’s considered a more accurate representation than closing price. However, it’s also more complicated to calculate and understand.
How Adjusted Closing Price Works
Often, the closing price and adjusted closing price will be the same for a trading day. But when certain events occur, like a substantial dividend or a stock split, these numbers can differ significantly. Here’s how you’d calculate adjusted closing price following a dividend distribution or stock split.
Dividend Payments
If a company announces a dividend payment, you’d subtract the amount of the dividend from the share price to calculate the adjusted closing price. Let’s say a company’s closing price is $100 per share and it distributes a dividend of $2 per share. You’d subtract the $2 dividend from the closing price of $100. The adjusted closing price is $98 per share. As an example, let’s look at Johnson & Johnson, which paid out a $1.06 dividend on May 24, 2021. Its closing price on May 21, 2021, was $170.96 per share but its adjusted closing price after accounting for the dividend payment was $169.90.
Stock Splits
In a stock split, a company lowers its share price by splitting existing shares into multiple shares. Companies often split their stocks to make share prices more affordable to individual investors. The market capitalization, or the value of all the company’s outstanding shares, doesn’t change when a stock split occurs. Suppose a company’s shares sell for $40 and they undergo a 2-for-1 stock split. You’d use the split ratio, which is 2-to-1 in this case, to determine the adjusted closing value. You’d divide the $40 share price by 2 and multiply by 1 to get the adjusted closing value. If you owned a $40 share, you would own two $20 shares. The stock’s closing price would be $40, while its adjusted closing price would be $20. For example, Apple’s closing price on Aug. 28, 2020, was $499.23, when its stock split 4-1. But the adjusted closing price for the same date was $124.81.
What It Means for Individual Investors
Using a stock’s adjusted closing price is typically a better tool than the closing price for evaluating a stock over time. Going back to the Apple example, suppose you simply looked at the closing price in August 2020. You would conclude that Apple shares suddenly lost about 25% of their value, which, of course, wasn’t the case. By using adjusted closing value, you can more accurately calculate Apple’s returns and compare Apple to other securities. While calculating adjusted closing value may seem complicated, some stock-quote websites automatically calculate this number for you and include it in a stock’s historical data.
