Tag: return

  • Adjusted Closing Price – Find a Stock Return By Using It

    Adjusted Closing Price – Find a Stock Return By Using It

    A basic mistake is considering the closing prices of stocks for analysis instead of Adjusted closing price. 

    If you’re a beginner in investing, you probably already noticed the expression like “closing price” or “adjusted closing price.” These two phrases refer to different ways of valuing stocks. While with the term “closing price” everything is clear when it comes to the term “adjusted closing price” things are more complex. 

    When we say closing price it refers to the stock price at the close of the trading day. But to understand the adjusted closing price you will need to take the closing price as a starting but you’ll have to take into account some other factors too to determine the value of the stock. Factors like stock split, dividends, stock offerings can change the closing price. So we can say that the adjusted closing price gives us more exact the value of the stock.

    What is Adjusted Closing Price

    Adjusted closing price changes a stock’s closing price to correctly reveal that stock’s value after accounting for every action of some company. So, it is recognized as the accurate price of the stock. It is necessary when you want to examine historical returns.

    Let’s say this way, the closing price is just the amount of cash paid in the last transaction before the closing bell. But the adjusted closing price will take into account anything that might have an influence on the stock price after the closing bell. When we say anything it is literally anything: demand, supply, company’s actions, dividends distribution, stock splits, etc. So, you will need adjustments to unveil the true value of the stock.

    It is particularly helpful when examining historical returns. Let’s do that on an example of dividend adjustment calculation.

    Adjusted Closing PriceThe adjusted closing price for dividends

    When a stock increases in value, the company may reward stockholders with a dividend. It can be in cash or as an added percentage of shares. Whatever, a dividend will decrease the stock’s value since the company will get rid of the part of its value when paying out the dividends. So, the adjusted closing price is important because it shows the stock’s value after dividends are posted.

    Subtract the amount of dividend from the previous day’s price. Divide this result by the same day’s price. Finally, multiply historical prices by this last figure.

    For example, the prior trading day was Tuesday and a stock closing price was $50. The day after, on Wednesday,  it starts trading at a last price minus dividend, for example, trading ex-dividend based on a $4, so the stock will be trading on Wednesday at $46. If we don’t adjust the last price the data, for example, the charts will show a $4 gap.

    What do we have to do?

    We have to calculate the adjustment factor,

    So, by following already described we have to subtract the $4 dividend from the closing stock price on Tuesday (in our case)

    $50 – $4 = $46

    Further, we have to divide 46.00 by 50.00 to determine the dividend adjustment in percentages. 

    46.00 / 50.00 = 0.92

    The result is 0.92.

    Let’s see how to adjust the historical price.

    The next step is to multiply all historical prices preceding the dividend by this factor of 0.80. This will alter the historical prices proportionately and they will stay logically adjusted with current prices.

    After stock splits

    Stocks split occurs when the price of individual shares is too high. So, the company may decide to split stocks into shares. When the company increases the number of shares, the logical consequence is the value of each share will decrease due to the fact that each share factors a smaller percentage.

    In our example, if the company splits each $50 share into two $25 shares, the adjusted closing price from the day prior to the split is $25. The adjustment reveals the stock split, not a 50% decline in the share price.

    New Offerings

    For example, the company decided to offer extra shares to boost capital. This means the company issues new shares of stock in a rights offering. The right offering means that the shareholders have the chance to buy the new shares at lessened prices.

    But what happens when new shares come to the market? The price of the shares, of the same company, that are already on the market will drop. How is that possible? Well, think! The number of shares is increased and each of them now cost less. It’s almost the same with a stock split.

    The adjusted closing price values the new offerings and the devaluation of each individual stock.

    Find a stock return 

    A stock’s adjusted closing price provides you all the info you need to watch closely to your stock. You can use some other methods to calculate returns, but adjusted closing prices will spare you time. As we see in the text above, adjusted closing prices are already adjusted. The dividends are posted, the stock’s splits are done, the rights offerings also. So we can make a more realistic return calculation. The adjusted closing prices can be an excellent tool that can help us improve our strategies. Moreover, we can do that in a short time since the adjusted closing price already took into account almost all factors that directly impact the overall return. For example, just compare the adjusted price for a particular stock over some given period and you will find its return.

    It’s easy to find historical price data, just download it. Further, mark the column of dates and a matching column for adjusted closing prices and set up in descending order. For example, you want to examine a period from March to October. On the top, you should have data for March and below data for April and so. 

    Let’s find the return

    Firstly, compare the closing price in one month to the closing price from the prior month. To unveil the percentage of return you have to divide the chosen month’s price by the previous month’s price. Subtract the number 1 from that result, then this new result you have to multiply by 100 to turn it from decimal to percentage form.
    It should look like this:
    In March stock price was $50, in April it was $55, so the return was 10%

    ((55/50)-1)x100 = 10

    Since you have to do this calculation for each month add the column for return if you are working in a spreadsheet.

    To calculate the average return for the given period, from March to October, just sum each return for all months you observe and divide the result by the number of months.

    Simple as that.

    Bottom line

    The adjusted closing price is a stock’s closing price on any chosen trading day but altered to cover dividends posted and the company’s actions like split shares and the rights offerings that happened at any time former to the next day’s open.

    So, you can see that for serious analysis, the closing price will never reveal the real value of the stock, the stock’s value after considering any company’s actions. So it is always suggested to use the adjusted closing price if you want reliable analysis.

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  • How to Find Dividend Yields on Stocks’ List?

    How to Find Dividend Yields on Stocks’ List?

    How to Find Dividend Yields on Stocks' List?

    By Guy Avtalyon

    The dividend yields are metric. For every single investor, the most important question is ‘How much money can I make’. At least, the reason to buy a stock or bond or ETF is to make money. It is important to understand what people mean when they talk about yield, return, and types of both. Investors have several ways to measure the money they expect to get, Depending on their investment strategies, investors have several ways to measure the money they expect to get. Managing risk is important. 

    What produces the dividend yields?

    Yield is the earnings you can make with an investment in a period of time. It’s the cash you get from making the loan. For example, you loan a friend $1,000 for a year. And your friend agrees to pay you back that $1,000 in twelve months, as well as $10 a month. For that loan, you’ll get back the principal as well as an extra $120.

    That means you’ll end up with 12% more money at the end of the year than you started with. This is easy to understand with loans and it’s similar to bonds, where the bond rate and payout periods determine what kind of money you get back and how often you’re paid.

    Do bonds give yields?

    But bonds are a little bit more complicated than loans because you can buy them from other investors. But the yield falls as the price rises because the yield depends on both the interest rate and the price you paid.

    Let’s say someone else bought the loan to your friend for $1100 and the 12% interest rate stayed the same, they’d only get $20 for the year, or 1.82% interest. That’s a  different yield from 12%, don’t you think.

    What determines the yields?

     

    The yield depends on both the interest rate and the price you paid. If you want a higher yield, you either need to earn more money from your investment every month or pay a lower price for the investment.

    Hence, there are different types of yield you can measure. But, you must know how stocks produce yield, for this to make sense.

    Do stocks give yields?

    Stocks don’t pay interest, but stocks may pay dividends. The dividend yield is easy to compare to other investments if you know what you paid for a stock. The problem is you can’t measure what everyone else paid for it. There are more possible to see the current yield of a stock, which divides the annual dividend payout with the current price of the stock.

    How to find dividend yields?

    If you want a regular cash income from your stock portfolio, you’ll have to understand dividend yield. The dividend yield is a pivotal metric that enables investors to analyze stocks. According to stock capability to generate dividends traders are trading them at many higher prices. To define dividend yield, you’ll need to know the total of a stock’s dividend payments per year and the current stock price.
    To calculate dividend yield you’ll have to add all the dividends paid per common share over the last year. Further, divide this amount by the current price. Then, multiply this result by 100 to discover the yield.

    For example, if the stock trades at $10 per share, the dividend yield is $0.70 divided by $10 and times 100, which is 7%.
    That would mean that for every $100 you invest in this stock, you receive income of $7 per year. Compare dividend yields of different stocks, and you’ll find the best investment choice.

    What is the difference between dividend yields and returns?

    But, not all stocks pay dividends. You might earn a great return that never pays you a penny.  But it is possible you’ll get money from selling a share for more than you paid for it. The same goes for bonds.

    Slowly, that combination of the profit you made from the sale plus any dividends you’ve received makes up your total return. Exactly as with yield, the price you paid is the most important factor in your return.

    But notice that there is one more essential difference between yield and return.

    The yield looks to the future.

    What can you earn in a year, what dividends will you receive, what interest payments will you get? These are predictable, depending on the risk of the investment of course.

    Return looks to the past.

    It includes interest or dividend payments, but it also depends on the price at which you sold your investment.

    What to maximize yield or return?

    The real goal of understanding yield and return is to compare how similar investments meet your investing goals. Any investment that returns money to you, produce regular income. If you can live from the incomes of your investments, that can be a great modus operandi.

    But if you want to build real wealth and you have enough for a long-term investment, total return is more important. But never ignore yield because it can be a great way to make better your returns. Pay attention to yield but look for good returns from share price realization as well.

    Whatever, being careful about the price you pay for investment will help you improve your yields and total returns.