Introduction

A corporation action affects the share price severely due to the inverse relationship between the amount supplied and price. The greater the amount supplied, the lower the price. The number of shares available in the stock market are scaled up or down based on the types of corporate actions implemented. The characteristics of each corporate action were discussed in our previous blogs – MQ Trader – Introduction of Corporate Actions (Part 1) and MQ Trader -  Introduction of Corporate Actions (Part 2).

The original share price is unable to reflect the performance of a company accurately when the bearish trend of an unadjusted chart is majorly contributed by the corporate actions which are neutral events. In this topic, we are going to introduce the adjusted price in MQ Trader technical charts which modifies the relevant data to eliminate the misleading information caused by the corporate actions.

Adjusted Price vs Original Price

1. Adjusted Price: Stock prices will be amended to include any Dividends and corporate actions such as Bonus Issue, Share Split and Consolidation.
2. Original Price: The historical stock prices that have been recorded without any amendments.

Source: MQ Trader Stock Analysis System

The importance of adjusted price

Price adjustment is useful in removing large gaps in share price caused by corporate actions such as splits, consolidations and bonus issue. It can help to counteract the remarkably huge impacts contributed by different corporate actions. Table 1 shows how corporate actions influence the amount of outstanding shares and the share price.

Table 1: The effects of corporation actions

Where n: initial number of outstanding shares, p: Initial share price

By using this function, all price movements of the shares will be based on the pure market forces. As a result, misleading trading signals can be prevented from appearing on the technical charts to avoid oversold or panic selling when investors are unaware for the declaration of any corporate action.

How does adjusted price work?

In the next blog post - MQ Trader - Adjusted Price [CCK, TIGER, TOPGLOV], we will be focussing on how the adjusted price influence the share price movement by using a few examples for demonstration purpose by using MQ Trader Stock Analysis System. 

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Disclaimer

This article does not represent a BUY or SELL recommendation on the stock covered. Traders and Investors are encouraged to do their own analysis on stocks instead of blindly following any Trading calls raised by various parties in the Internet. We may or may not hold position in the stock covered, or initiate new position in the stock within the next 7 days.

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