Ask Colin

You informed me when I was back testing the ASX 100 that it is important to adjust all those stock prices and yields that have been influenced by company share price splits, rights issues and so on. For this we may need further data than is published in the list of the top 150 by market cap in the newspapers, True? Or perhaps Not?

It is absolutely essential that you make adjustments when the stock issues new shares or reconstructs its shares etc. If you don't then you are not making a fair comparison.

When these events take place, a factor is established, which is applied to all past data. The ASX used to publish this in STATEX, but I do not know if it is still done. You should ask a research analyst.

Adjustments can also be made from first principles. In fact, I always do this to make sure that the adjustment makes sense. The way you do this is to look at it as an investor. For example -

You buy 1000 shares for $10 each. The stock splits 1 into 2. You now have 2000 shares. So the adjusted cost is $10/2 - $5. If the stock paid a $1 dividend before the split, then the dividend would also be adjusted $1/2 - 50c. If you did not do this, the dividend would be twice what it should have been.

All situations are not a simple as this. A particularly difficult one would be Telstra, which issued instalment receipts and there was as I recall also an incentive if you held the receipts through to the call. The only way to deal with this is - work out what number of receipts you "buy". Then follow through what happens as you meet the call etc.

The task is not overwhelming, as you might think. You will be selecting only a few stocks each year. Since each year is separate, you only have to worry if an issue takes place in the year you are holding it. Then you research that stock for that year to find out what change took place. Sources will be ASX, Stock Exchange Journal, AFR, the company, your broker. If all else fails in tracking the change or in working out how you should adjust it, a last resort is to accept the market's adjustment - find the date it went "ex" and work out a factor that eliminates the gap. This is a quick and dirty method and I would not use it unless all else failed.

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