Splits and Dividends in Price Data

When a company splits its stock 2 for 1, the share price halves overnight, but shareholders lose nothing: they own twice as many shares. When it pays a dividend, the price drops by roughly the dividend amount, but shareholders receive the cash. Raw price charts show these events as sudden drops that are not real losses. Adjusted prices rescale past prices so that the history reflects true investor returns. Using the wrong kind of price is one of the most common causes of misleading backtests.

Why adjustment is needed#

How adjustment factors work#

Most providers back adjust: they keep the latest prices unchanged and multiply all earlier prices by a factor.

• Split adjustment: for a 2 for 1 split, multiply all prices before the split by 0.5.
• Dividend adjustment: multiply all prices before the ex date by (1 minus dividend divided by the previous close).

Factors from multiple events are multiplied together.

Split adjusted versus fully adjusted#

Traps with adjusted prices#

1. Old prices change: every new dividend changes all earlier adjusted prices. A backtest rerun later uses slightly different numbers. Storing raw prices plus corporate actions avoids confusion. See Database Design for Market Data.
2. Price levels lose meaning: a fully adjusted price from ten years ago never actually traded. Rules like "buy below $10" or round number levels must use raw prices.
3. Very old prices can become tiny: after many splits and dividends, early adjusted prices can be fractions of a cent, which breaks some calculations.
4. Volume must be adjusted too: after a 2 for 1 split, pre split volume should be doubled to stay comparable.
5. Position sizing: share counts in a backtest should use raw prices on the trade date to stay realistic.

Futures: continuous contract adjustment#

Futures contracts expire, so long histories splice contracts together. The jump between an expiring and the next contract is not a real return. Back adjusted continuous series remove these gaps, using either a difference (subtract the gap) or a ratio (multiply by the ratio). Difference adjusted series can even turn negative far back in history. See Continuous Futures and Back-Adjustment and Rolling Futures Contracts.

Best practice#

• Store raw prices and a corporate actions table.
• Compute adjustment factors in your pipeline. See Data Pipelines and ETL.
• Use total return prices for returns and raw prices for price levels and order simulation.
• Check big jumps against corporate actions. See Cleaning Market Data.

Frequently asked questions#

What is an adjusted closing price?#

A historical price modified to account for splits and usually dividends, so that returns calculated from the series reflect what an investor actually earned.

Should I backtest with adjusted or raw prices?#

Use adjusted prices for returns and raw prices for price level rules, share counts and order simulation; a good backtest uses both.

Why did old prices on my chart change?#

New splits or dividends change the adjustment factors applied to all earlier prices in a back adjusted series.

Next, learn how to avoid using information before it existed in Point-in-Time and Survivorship-Free Data.