{"id":3079,"date":"2021-11-29T13:58:00","date_gmt":"2021-11-29T10:58:00","guid":{"rendered":"https:\/\/www.robomarkets.com\/blog\/?p=3079"},"modified":"2023-10-12T12:05:44","modified_gmt":"2023-10-12T09:05:44","slug":"calculating-stock-price-detailed-how-to","status":"publish","type":"post","link":"https:\/\/www.robomarkets.com.cy\/blog\/education\/calculating-stock-price-detailed-how-to\/","title":{"rendered":"Calculating Stock Price: Detailed How-To"},"content":{"rendered":"\n

<\/span>Introduction<\/span><\/h2>\n\n\n\n

In the below chart, you may view the unadjusted (or nominal) daily closing price of the Exxon<\/a> (XOM) stock since 1996.<\/p>\n\n\n\n

\"Exxon<\/a>
Exxon stock price chart<\/em><\/figcaption><\/figure>\n\n\n\n

This chart does not reflect the profit a trader would have made since 1996 – the changes in the nominal price only form one part of the investment results. Since 1996, Exxon has paid hundreds of dividends<\/a>, which made the stock price decline every time. Also, Exxon carried out stock splits on five occasions, on which, its stock price shrank. Exxon acquired several enterprises and merged with Mobil Oil in 1999, which also affected the price of its stock. However, none of the actions above influenced the stockholders because the alterations remained purely nominal.<\/p>\n\n\n\n

The time-series analysis of the stock price requires the adjustment for or elimination of such nominal changes. The historical stock price needs to be adjusted in such a way for the data received to represent the general profit the trader would have made if they have held a certain stock for a certain period. Through the adjustments, we create a series that reflects dividends, mergers, spin-offs, splits, and other actions affecting the factual profitability of the stock.<\/p>\n\n\n\n

Any such event or a change in the company’s structure brings about discontinuous changes in the nominal stock price. Moreover, these changes are not due to the sellers or buyers repricing the company – they are corporate rather than market actions. The price adjustment is meant for the elimination of such actions.<\/p>\n\n\n\n

Below, you may also view the chart of the adjusted Exxon stock price since 1996. It differs dramatically from the first one, being much closer to the economic reality.<\/p>\n\n\n\n

\"Exxon<\/a>
Exxon stock price chart<\/em><\/figcaption><\/figure>\n\n\n\n

Any professional analyst knows that the analysis of the stock must be based on the adjusted stock price. However, only a few have the financial mathematics knowledge required for adjusting. Of course, you can always refer to some third party to give you the adjusted prices. Nevertheless, understanding how these adjustments are made is key to a successful analysis.<\/p>\n\n\n\n

<\/span>Principles of adjustment<\/span><\/h2>\n\n\n\n

Almost always, stock prices<\/a> are backward adjusted. In other words, in every time series, the current day stock price is the same as the current price on the exchange. All adjustments are possible on historical data solely.<\/p>\n\n\n\n

The adjustment of historical stock prices is normally multiplicative. Thanks to this, the profit from holding the stocks<\/a> on the days when no adjustments have been made remains untouched regardless of all changes. Moreover, historically adjusted prices never turn out negative. However, some make additive adjustments, thereby triggering negative stock prices.<\/p>\n\n\n\n

Below, we will discuss the most common corporate actions<\/a> and their adjustments.<\/p>\n\n\n\n

<\/span>Cash dividends<\/span><\/h3>\n\n\n\n
\"Cash<\/figure>\n\n\n\n

When a company pays out dividends, the value of its share price declines. This is clear: the money is transferred from the company’s deposits to the clients, hence, the company costs this sum less. This means that, on the ex-dividend day, the stock price declines by the size of the dividend.<\/p>\n\n\n\n

\\begin{align} \n\\text{Share Price before Dividend} = \\frac{\\text{Company Value}} {\\text{Shares Outstanding}} \\\\ \n\\\\ \n\\text{Share Price after Dividend} = \\frac{\\text{Company Value – Total Cash Paid Out}}{\\text{Shares Outstanding}} \\\\ \n\\\\ \n=\\frac{\\text{Company Value}}{\\text{Shares}} \\ – \\ \\frac{\\text{Cash Paid Out}}{\\text{Shares}} \\\\ \n\\\\ \n=\\text{Share Price before Dividend – Dividend per Share} \n\\end{align}