How to handle corporate actions in backtesting

1. What is stock price adjustment?

Listed companies may choose to issue dividends or additional shares. These corporate actions can impact stock prices and create gaps in the price chart. Therefore, it's necessary to use stock price adjustment to reconcile corporate actions that result in stock price changes.

Stock price adjustment involves adjusting historical stock prices and trading volume based on the latest dividend or stock split data. The purpose is to ensure continuity between historical and recent prices, avoiding gaps caused by corporate actions.

2. Stock price adjustment in Backtesting

It is possible to adjust pre-event prices based on the price of the first day after the event, or adjust post-event prices based on the price of the last day before the event. Algo's backtesting will adjust the pre-event prices. Here is how stock price adjustment is used in the app.

Adjust Pre-Event Prices: After a stock goes ex-dividend, historical stock prices need to be proportionally reduced to maintain continuity. During the backtesting period, Futubull will automatically adjust pre-ex dividend prices and handle cash and holdings in the account whenever a corporate action occurs. Taking a stock split as an example, the price change without adjustment and with pre-event price adjustment are shown below.

3. Summary

Stock price adjustment can help investors better understand the stock price trend. Algo's backtesting has a price adjustment function, which can help users simulate actual investment performance. For more information, please refer to the following examples below.

Corporate Action	Stock Price Change	Holdings Change	Example
Cash Dividend	Latest prices fall Past prices fall	Holdings remain unchanged Holdings market value decreases Account cash increases	Assume that before corporate action, the stock price was $20, and 100 shares were held. After the corporate action, $1 is paid for every 10 shares. The latest stock price decreases to $19.9, and the past prices all decrease by $0.1. The number of shares held remains at 100, but the market value of the holdings decreases to $1,990, and the account cash increases by $10.
Stock Split	Latest prices fall Past prices fall	Holdings increases Holdings market value remains unchanged	Assume that before corporate action, the stock price was $20, and 100 shares were held. After the corporate action, 1 share is split into 2 shares. The latest stock price drops to $10, all past prices are divided by 2, the holding quatity increases to 200 shares, and the market value of the holdings remains unchanged at $2,000.
Reverse Stock Split	Latest price rises Past prices rise	Holdings decreases Holdings market value remains unchanged	Assume that before corporate action, the stock price was $20, and 100 shares were held. After the corporate action, every 2 shares are merged into 1 share. The latest stock price rises to $40, and the past prices are all doubled. The holding quantity decreases to 50 shares, and the market value of the holdings remains unchanged at $2,000.
Share Increase	Latest prices fall Past prices fall	Holdings increases Holdings market value remains unchanged	Assume that before corporate action, the stock price was $20, and 100 shares were held. After the corporate action, every 10 shares were increased by 10 shares. The latest stock price decreases to $10, and all the past prices are halved. The holding quantity increases to 200 shares, and the market value of the holdings remains unchanged at $2,000.
Bonus Issue	Latest prices fall Past prices fall	Holdings increases Holdings market value remains unchanged	Assume that before corporate action, the stock price was $20, and 100 shares were held. After the corporate action, every 10 shares are given 10 shares as a bonus issue. The latest stock price decreases to $10, and all the past prices are halved. The holding quantity increases to 200 shares, and the market value of the holdings remains unchanged at $2,000.
Rights Issue	Latest prices fall Past prices fall	Holdings increases Holdings market value remains unchanged	Assume that before corporate action, the stock price was $20, and 100 shares were held. After the corporate action, every 4 shares are issued 1 share through a rights issue. The latest stock price decreases to $16, and all past prices decrease to 80% of their previous value. The holding quantity increases to 125 shares, and the market value of the holdings remains unchanged at $2,000.
Additional Shares	Latest prices remain unchanged Past prices remain unchanged	Holdings increases Holdings market value remains unchanged	Assume that before corporate action, the stock price was $20, and 100 shares were held. After corporate action, the latest stock price remains unchanged at $20, the holding quantity remains unchanged at 100 shares, and the market value of the holdings remains unchanged at $2,000.
Separation	Latest prices falls Past prices fall	Holdings remain unchanged Holdings market value decreases Account cash increases (the other company's stocks obtained through separation are converted into cash)	Assume that before corporate action, the stock price was $20, and 100 shares were held. After corporate action, every 10 shares distribute 1 share (worth $5) of another company's stock. The holding quantity remains unchanged at 100 shares, and the market value of the holdings decreases to $1,950, and the account cash increases by $50.

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