Listed companies may choose to issue dividends or additional shares. These corporate actions can impact stock prices and create gaps in the price chart. Therefore, it's necessary to use stock price adjustment to reconcile corporate actions that result in stock price changes.
Stock price adjustment involves adjusting historical stock prices and trading volume based on the latest dividend or stock split data. The purpose is to ensure continuity between historical and recent prices, avoiding gaps caused by corporate actions.
2. Stock price adjustment in a backtest
There are two types of stock price adjustments: forward adjustment and backward adjustment.
Pre-event prices can be adjusted based on the price on the first day following the event, or post-event prices can be adjusted using the price from the last day before the event. Moomoo Algo's backtesting will adjust the pre-event prices. Here is how stock price adjustment is used in the moomoo app.
2.1 Backward price adjustment
After a stock goes ex-dividend, historical stock prices need to be proportionally reduced to maintain continuity. During the backtesting period, moomoo will automatically adjust pre-ex dividend prices backward and handle cash and holdings in the account whenever a corporate action occurs. Taking a stock split as an example, the figures below show the price change without adjustment, as well as the backward adjusted price.
3.Summary
Stock price adjustment can help investors better understand the stock price trend. Moomoo Algo's backtesting has a price adjustment function, which can help users simulate actual investment performance. For more information, please refer to the following examples below.
Corporate Action
Stock Price Change
Holdings Change
Example Before Corporate Action
Example After Corporate Action
Cash Dividend
• Latest price falls
• Past prices fall
• Holdings remain unchanged
• Holdings market value decreases
• Account cash increases
Stock price: $20/share
Shares held: 100 shares
Cash dividend: $1 paid for every 10 shares held
New stock price: $19.9/share
Adjusted historical prices: All past prices decrease by $0.1
Total shares held: 100
Total market value of holdings: $1,990
Account cash increase: $10
Stock Split
• Latest price falls
• Past prices fall
• Holdings increase
• Holdings market value remains unchanged
Stock price: $20/share
Shares held: 100 shares
Stock split: 1 share split into 2 shares
New stock price: $10/share
Adjusted historical prices: All past prices divided by 2
Total shares held: 200 shares
Total market value of holdings: $2,000
Reverse Stock Split
• Latest price rises
• Past prices rise
• Holdings decrease
• Holdings market value remains unchanged
Stock price: $20/share
Shares held: 100 shares
Reverse stock split: Every 2 shares are merged into 1 share
New stock price: $40/share
Adjusted historical prices: All past prices doubled
Total shares held: 50 shares
Total market value of holdings: $2,000
Capitalisation Issue
• Latest price falls
• Past prices fall
• Holdings increase
• Holdings market value remains unchanged
Stock price: $20/share
Shares held: 100 shares
Capitalisation issue: For every 10 shares held, an additional 10 shares are given
New stock price: $10/share
Adjusted historical prices: All past prices halved
Total shares held: 200 shares
Total market value of holdings: $2,000
Bonus Issue
• Latest price falls
• Past prices fall
• Holdings increases
• Holdings market value remains unchanged
Stock price: $20/share
Shares held: 100 shares
Bonus issue: 10 new shares given for every 10 shares held
New stock price: $10 per share
Adjusted historical prices: All past prices are halved
Total shares held: 200 shares
Total market value of holdings: $2,000
Rights Issue
• Latest price falls
• Past prices fall
• Holdings remain unchanged
• Holdings market value decreases
• Account cash increases
Stock price: $20/share
Shares held: 100 shares
Rights issue: 1 additional share at $15 for every 4 shares held
New stock price: (1 share at $15 + 4 shares at $20) / 5 shares = $19 per share
Adjusted historical prices: Original price × 0.8 + $3
Total shares held: 100 shares
Total market value of holdings: $19 * 100 shares = $1,900
Account cash increases by $100
Additional Shares
• Latest price falls
• Past prices fall
• Holdings remain unchanged
• Holdings market value decreases
• Account cash increases
Stock price: $20/share
Shares held: 100 shares
Additional shares: For every 4 shares held, 1 additional share could be purchased at $15/share
New stock price: (1 share at $15 + 4 shares at $20) / 5 shares = $19 per share
Adjusted historical price = Original Price × 0.8 + $3
Total shares held: 100 shares
Total market value of holdings: $19 * 100 shares = $1,900
Account cash increases by $100
Separation
• Latest price falls
• Past prices fall
• Holdings remain unchanged
• Holdings market value decreases
• Account cash increases (the other company's stocks obtained through separation are converted into cash)
Stock price: $20/share
Shares held: 100 shares
Separation: 1 share of another company is given for every 10 shares held
New shares are worth $5 each
Total shares held: 100 shares
Total market value of holdings: $1,950
Account cash increases by $50
Risk Disclosure This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Moomoo makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose of the above content.