How to Calculate Real Stock Prices

by Carmelo Montalbano ; Updated July 27, 2017
Buy strength and sell weakness.

Real stock prices are not the same as the last traded stock price. Real stock prices are adjustments to closing stock prices. The adjustments are used in a variety of ways, including dividends, the range of prices and the closing price of the day. In addition, there are technical definitions of real stock price used to adjust closing prices for one-time events. Use the technique most appropriate to your investing needs. Know that there is often a large discrepancy between stock prices and the underlying value of a stock that real stock prices attempt to uncover.

Step 1

Understand that stock prices are collected by their open, high, low and closing prices. Know that these values are together called the range. Use the closing price as the most important of all prices as this is the price traders pay to hold a stock overnight. Know that these prices, combined with volume calculations, are used in many technical indicators. Real stock prices are either the difference between the private and public value of the company, the appropriate valuation of a company or the adjusted closing price.

Step 2

Take the closing price of a stock. Get valuations of the company's value as a private concern. Valuations can be found by examining similar-size transactions. Use the stock price plus 90 percent of the difference to value the company as a private concern. The 10 percent difference is considered the buyer's control premium. Use the result as the best estimate of the real value of the stock as a private entity.

Step 3

Look at current earnings of the company and next year's forecast of earnings. Divide the difference in half. Compute the price-earnings ratio (the stock price divided by the earnings) for similar companies in the same sector and industry. Apply the average price-earnings ratio to the average stock earnings of the specific company to get the real stock price value.

Step 4

Compute technical stock adjustments to the closing price of stock. Add back dividends paid on ex-dividend dates to the closing price to reflect the cost of the dividend. The result is a real closing price.

Step 5

Compute the effect of stock splits on a real stock price. Make the price comparable by dividing the stock price by the inverse (the reciprocal) of the stock split. For example a 2-for-1 stock split of a stock that closes post-split at 10 is computed by dividing 10 by 1/2 (10/.5). The result is 20.

Step 6

Recompute a stock price that makes a cash dividend. A $3 distribution on a stock that closes at $50 has a real price of $53.

Tips

  • Graham and Dodd's "Security Analysis" is considered the bible of value investors. It suggests many uses of real stock prices.

Warnings

  • Never trade with real funds unless you have tested your strategies with 'paper trades' in a variety of economic circumstances, such as bull markets, bear markets and sideways price action.

About the Author

After an 18-year career on Wall Street as a trader of municipal and mortgage backed securities, Carmelo Montalbano developed a very large desktop trading application that managed more than 30 institutional portfolios. Technology and small business acquisitions continue to be his primary interest.

Photo Credits

  • http://www.sxc.hu/photo/182457