So indeed these big price drops were caused by stock splits,
why do stocks split?
The most common reason and as far as I know,
the only reason, is that the price is too high.
Why is a high price a problem?
Well, consider for a moment that stock may be above say $500 per share.
People like to buy stocks in groups of 100.
So that means, for instance, it would be $50,000 to buy or
sell a block of 100 shares of a $500 stock.
Now, of course, you can buy it in smaller blocks.
That's fine.
But another aspect is that options when they're traded on
stocks are usually traded with regard to 100 shares.
So options covering 100 shares of $500 stocks,
becomes suddenly very expensive and less liquid.
So from the point of view of options, and
also individual stock shares, very high prices are a problem.
Even in the case where you want to buy just one share of the stock,
let's suppose you're setting your kid up with an account, and
you want to buy one share of Apple.
Earlier this year that would have cost you $600.
So even buying one share of a very expensive stock can be a problem.
Finally, one other issue here is if you're building a portfolio and you
want to have a finely tuned proportion of each stock in your portfolio.
If some of the stock prices are very high,
it becomes difficult to get that fine resolution that you want.
So, when the prices get very, very high, what the companies do is they say, look,
let's take that 1 share that's price at $300 and break it into 4 shares at 75.
So that's called a 4 of a 1 split.
In this case, we had a 2 for 1 split.
So that's why splits happen.
Now let's look at this data.
Suppose you read this data into your computer and
you were going to analyze it and look for trading opportunities.
Well, your algorithm might discover, hey,
look, here's a great shorting opportunity.
Whenever this condition occurs, whatever that was, you want to short the stock,
and then you'll see a 75% drop, and you'll reap a significant reward.
And also here,
you might identify this time as a good opportunity to short as well.
Well, of course, that's wrong because what's happening underneath,
is that the value of the company isn't really decreasing.
You just have more shares.
So if you want to trade using this
actual closed data, you have to account for all these splits.
And that becomes cumbersome.
So someone came up with a great solution to this problem.
Mainly, adjusted close.
Or adjusted prices.
And the idea is to create a timeline of prices that are adjusted to account for
these changes.
Such that you can look back over adjusted close.
Simulate buying at a particular time.
And seeing how the value increases over time
accurately without having to account for these splits.
Here's how it works.
The first thing to point out is that at the very last day, in other words,
today, adjusted close and actual close are always the same.
Now we track back in time and adjusted close and
actual close are exactly the same.
But then, on this day, when we see this 2 to 1 split.
What we do is we go back over all the historical data, and
we divide it all by 2.
So the first day before the split,
we get about a $125 price instead of that 250.
Then when we get to this 4 to 1 split we divide by 2,
and then by 4, so that on this 1 day before that split
our price is in the neighborhood of about $70,
and that continues back in time.
As we go back we adjust for each of the splits in history.
So now we have a nice smooth price timeline without these big jumps.
And for instance, if you consider that you bought the stock on this day and
held it until this day, the accumulation in value that you see there is accurate.
That reflects all those splits and you would have a lot more shares here,
but this would also correctly represent the increase in value.