Adjusted charts

Hi,

With my ASB Securities online share trading account I noticed something when looking at share price charts:

http://i46.tinypic.com/awm60.jpg

There is an option for "adjusted" or "unadjusted" charts.
Could someone please explain what is meant by adjusted in this context. I notice the difference in prices, but just unsure what it is due to.
My thoughts are either dividend payments, or inflation.

Thank you kindly :)

Quote:

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Originally Posted by maucat41

Hi,

With my ASB Securities online share trading account I noticed something when looking at share price charts:

http://i46.tinypic.com/awm60.jpg

There is an option for "adjusted" or "unadjusted" charts.
Could someone please explain what is meant by adjusted in this context. I notice the difference in prices, but just unsure what it is due to.
My thoughts are either dividend payments, or inflation.

Thank you kindly :)

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Hi maucat41.

Thanks for your post.

The chart reads dollars per share over a selected time period, and the time period can be selected by you the user over any range you desire.
This leaves only the $/share bit that can be adjusted. $/share is historical data cast in stone at the close of each trading day.

Through time, many companies issue new shares and/or buy back shares in their own business and/or have share splits and/or share consolidations. When this happens, the $/share figure alters due to the number of shares (i.e. the denominator) changing.
Unwary investors often neglect this at their peril. If the number of shares over the charted time period is not constant, the chart taken in its entirety essentially becomes meaningless, so a good chart will adjust the historical $/share figure to 'pretend' the number-of-shares-issued is constant... the number-of-shares-issued figure being the current amount out in the market.

Refer the following picture of 5 years of ALF trading history:

Attachment 4290

Big price difference over the same time period.
With ALF's grand demise over the last many years, even when adjusted, one would have enough trouble finding out their (ALFs) trading price in more recent times. But unadjusted is 100 times worse.

An unsuspecting person would assume that ALF's share price according to the chart has dropped from $150/share to basically zero. The reality is much different though. ALF never got close to even $10/share let alone $100/share or more.

The above is an extreme example to help answer your question (and ALF essentially dropped to zero anyway making chart readability still difficult.

The unadjusted chart is still useful in analysing historical $/share figures, but this should be done only when you know the circumstances surrounding the price at the time. For this you will need the relevant annual reports. Even then it is possible to miss something so be careful out there.

Vaygor1.

Seems to be an issue on my posted pictures turning invalid.
Here it is again. I will check back later to see if it is still working.

Attachment 4291

Vaygor1.

Cheers for the explanation; I think I understand it now. Please read this to make sure I understand correctly. I may be way off with my economic concepts because I have had no formal training and am completely self-taught; I encourage criticism.

Basically an Adjusted Chart adjusts the historical Dollars per Share prices according to the current number of shares.
This is required for a meaningful chart because the number of shares can change over time. A chart with unadjusted prices would misrepresent the comparison of the current value with previous values.

Example:
In 2010, Example Company Limited has a market cap of $10,000,000 and 500,000 shares. This would lead to a share price of $20.00.
In 2013, the market cap has doubled to $20,000,000 but there are now 400,000 shares. The share price is $50.00.
Without adjusting for the change in number of shares, my immediate reaction is to say the shares are now 2.5x "better" (for lack of a better word) ($50 per share/$20 per share = 2.5).
However when the price is adjusted, we can now say that the shares are only 2x better ($10,000,000/400,000 shares = $25 (adjusted share price for 2010); $50 per share/$25 per share = 2).

When we look at a chart, we are looking at how well the company has been performing. A change in the number of shares in a company distorts the performance portrayed by the Dollars per Share vs. Time chart.

Okay, so why don’t we just look at Market Cap to see how the company has been performing? If a company performs a capital rise by issuing new shares, the Market Cap will appear to magically increase instantaneously. Again this is a poor indicator of company performance because the number of shares would have increased at this point.

Summary:
Adjusting removes the effect on share price performance due to changes in number of shares, resulting in an accurate representation of company performance through the dollars per share price chart.

Quote:

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Originally Posted by maucat41

Cheers for the explanation; I think I understand it now. Please read this to make sure I understand correctly. I may be way off with my economic concepts because I have had no formal training and am completely self-taught; I encourage criticism.

Basically an Adjusted Chart adjusts the historical Dollars per Share prices according to the current number of shares.
This is required for a meaningful chart because the number of shares can change over time. A chart with unadjusted prices would misrepresent the comparison of the current value with previous values.

Example:
In 2010, Example Company Limited has a market cap of $10,000,000 and 500,000 shares. This would lead to a share price of $20.00.
In 2013, the market cap has doubled to $20,000,000 but there are now 400,000 shares. The share price is $50.00.
Without adjusting for the change in number of shares, my immediate reaction is to say the shares are now 2.5x "better" (for lack of a better word) ($50 per share/$20 per share = 2.5).
However when the price is adjusted, we can now say that the shares are only 2x better ($10,000,000/400,000 shares = $25 (adjusted share price for 2010); $50 per share/$25 per share = 2).

When we look at a chart, we are looking at how well the company has been performing. A change in the number of shares in a company distorts the performance portrayed by the Dollars per Share vs. Time chart.

Okay, so why don’t we just look at Market Cap to see how the company has been performing? If a company performs a capital rise by issuing new shares, the Market Cap will appear to magically increase instantaneously. Again this is a poor indicator of company performance because the number of shares would have increased at this point.

Summary:
Adjusting removes the effect on share price performance due to changes in number of shares, resulting in an accurate representation of company performance through the dollars per share price chart.

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Using your example above, in 2010 the price was $20/share. In 2013 the price is $50/share. Well, that is 2.5x better but not because the earnings ability of the example company has gone up by 2.5 times. It has only gone up by only 2 times.

Issuing new shares for money and assuming the share price remains constant throughout the exercise will increase market cap because the company now has more money. It's not too magical.

Market cap is looked at a lot but for day-to-day reporting the number is generally too big and has too many zeros. Number's of shares issued doesn't change that often so the price/share becomes the reporting standard and hence adjustments are then required.

Your summary is correct.