Understanding Equities Data

This article has been written for early career readers who are hoping to gain an introductory understanding of equities data.

In this brief tutorial we will take a look at the different aspects of end-of-day equities data. We will develop an understanding of what the Open, High, Low and Close (OHLC) prices mean, as well as discuss the traded Volume. We will look at how a typical Adjusted Close price is calculated and the effects that stock splits, dividends and rights offerings have on our data and why they are important.

If you would like to follow along with any of the code in this tutorial we will be using data for AAPL from October 30th 2010 to October 30th 2020 inclusive. This data is freely available from vendors such as AlphaVantage or Yahoo Finance. The environment utilised for this article consists of Python 3.8, Pandas 1.3 and Matplotlib 3.4.

When working with financial data in Python the most appropriate way to evaluate and analyse the data is to use the Pandas library. For more information on using Pandas check out our Quantcademy course on Introduction to Financial Data Analysis with Pandas. We will begin by creating a DataFrame, which we have named aapl, and ensuring that the date column has been converted correctly to a Pandas datetime object. How you achieve this will depend largely on how your data is stored. We are using the Pandas function read_csv().

import pandas as pd
aapl['Date'] = pd.to_datetime(aapl['Date'])


Note: Make sure to adjust the /PATH/TO/YOUR/CSV to point to the downloaded Apple daily stock data CSV file.

Once you have created a DataFrame containing your stock data you can display the first few rows using the command aapl.head(). You should see the following output.


Out[1]:
Date  Open  High  Low   Close   Volume  Adj Close
0   2010-11-01  302.22  305.60  302.20  304.18  15138900  9.386487
1   2010-11-02  307.00  310.19  307.00  309.36  15497500  9.546333
2   2010-11-03  311.37  312.88  308.53  312.80  18155300  9.652486
3   2010-11-04  315.45  320.18  315.03  318.27  22946000  9.821281
4   2010-11-05  317.99  319.57  316.75  317.13  12901900  9.786103



## What is Open, High, Low, Close?

When analysing the above stock data we can see that there are five different price columns and one volume column. The open price refers to the price at which the stock started trading each day. The close price is the last buy-sell order that was executed for the stock. It is the price agreed upon after a full day of trading. Depending on the liquidity of the stock this may have occured in the final few seconds of trading or much earlier in the day. The closing price of a stock is considered to be the standard measure of value for a specific day.

As demonstrated in the above stock data the opening price is not necessarily the same as the closing price from the previous day. Opening price deviations are due to the effects of after-hours trading. Corporate announcements such as earnings events, man-made or natural disasters that occur after market close can all have an impact on the price of an equity. These factors encourage investors to engage in after-hours trading.

After-hours trading begins at 4pm and ends at 8pm. Stock volume is generally lower than in normal trading hours. As a result the spread between the bid and offer is often much wider. This means that it is much easier for the price of an equity to be pushed higher or lower, requiring fewer shares than in normal hours to make an impact on the price of the asset. Stop loss orders are often used in these circumstances so that trades are only executed at prices previously determined by traders. However, due to the lower volumes of available stock they are more likely to be unfilled. As these incomplete orders are executed at prices that differ from the previous day's close they cause a disparity which affects the next day's opening price.

High refers to the highest price at which a stock was traded during the time period specified. Likewise, Low refers to lowest traded price.

## How is Volume Recorded?

Volume is a measure of the number of shares traded in a particular time period. Each time shares are bought and sold the trade volume is recorded. If the same shares are bought and sold multiple times, the volume of shares in each transaction is recorded. Volume doesn't reflect the number of available shares, it is a measure of share turnover, a count of all transactions that occur on every share. Every market exchange tracks their trade volume and provides estimates at an intraday frequency. An accurate report of the total daily volume is provided the following day.

Volume is often used as a technical analysis indicator. Trade volume is considered a measure of market strength. A rising stock price with increasing volume indicates a healthy market. The higher the volume of trades the more liquidity the stock has and the higher the volume of trades during a price change, the more significant that price change becomes.

The final column in the daily data above is the adjusted close price. This is the most useful column for analysing historic price changes. It incorporates changes in the price of an equity resulting from dividend payouts, stock splits and from new shares being issued. In order to deliver a coherent picture of stock returns the historic close price must be adjusted for all corporate actions. In practice this is handled for you by most data providers but it is necessary to understand how these corporate actions affect close prices and how the adjustments are made.

### The Effect of Stock Splits

A stock split is a multiplication or division of a company's share content, without a change in its market capitalisation. If a stock splits 2:1 then a company has doubled the number of shares by halving each share's value. This is an example of a forward split. If an investor owned 20 shares prior to the split they would own 40 shares subsequently, but the shares would equate to the same dollar value. A company may consider a forward split as a way to reduce their share price making it more affordable for smaller investors to trade their shares.

The announcement of a split draws media attention to a company and so a forward split is usually followed by a price rise. After the split there is often an increase in volume traded as many new smaller investors take the opportunity to purchase shares. Existing investors may seek to rebalance their positions, allowing capital previously tied up in smaller amounts of the high value shares to be reallocated to different investments. They may also take the oppotunity to double down on their existing positions by purchasing more shares at the new lower price. All of these factors increase liquidity allowing the shares to be traded more easily and quickly.

### Rights Offerings

A rights offering is an offer to buy new shares created by a company. It is made to current shareholders and entitles them to purchase new shares at a reduced value to that presented to the public. This is often carried out by a company to raise additional capital. The creation of new shares lowers the value of the existing shares as it increases supply and each share now represents a smaller amount of the net profit.

The group of rights offered to shareholders are known as subscription warrants and are in effect a type of option. The shareholder has the right but not the obligation to purchase the shares within a specific period, which is usually no more than 30 days. Until the date at which the shares must be purchased these rights are transferable and may be sold. Their value compensates the shareholder for the dilutative effect of creating the new shares. The rights issue ratio describes the number of additional shares a shareholder may purchase and is based upon the number of shares they currently own. So if the rights issue ratio is 1:2 a shareholder may purchase one additional share for every two shares they hold. The ratio is expressed as rights:owned.

The adjusted close price takes into account the dilutive effect of the rights offering. The close price is adjusted in a simialr way to that of dividends and stock splits, by multiplying with an adjustment factor. In the case of a rights offering the adjustment factor is calculated from the rights issue ratio.

Let's continue with our above example. A company announces a rights offering to shareholders with a rights issue ratio of 1:2. The adjustment factor is (1+2)/2 or 3/2 = 1.5. In this case all prior closing prices of the stock will be multiplied by 1.5.

As you have seen the adjusted close price alters the close price based on the effects of corporate actions. It makes a stock's performance easier to evaluate as well as allowing an investor to compare the performance of multiple assets. Since it does not suffer from price drops due to stock splits it is more appropriate for backtesting any trading strategy rules.

## Ticker Symbol Changes

Stock tickers are created when a company begins to trade publicly on an exchange. They identify the stock at the exchange level. Note that the ticker is not to be confused with the International Securities Identification Number (ISIN) which is a unique identifier for a security. For example, IBM is traded on 25 different stock exchanges, it has 25 different tickers but only one ISIN. By convention the symbol or ticker is often an abbrieviation of the company name, although this is not a requirement. Stock tickers were first created by Standard & Poor (S&P) and are used across the world on every major exchange. The number of characters in a ticker is variable and dependant on the exchange. Stocks traded on the New York Stock Exchange (NYSE) have tickers made up of 3 characters while stocks traded on the NASDAQ have 4 characters.

Ticker symbol changes can result from a company name change, a merger or acquistion, or a delisting or bankruptcy event. When ticker symbol changes result from a merger, acquisition or name change the ticker symbols will update automatically within your brokerage account and in any data you may be using. The change will become visible within two to three days and all historical data will be updated accordingly.

Symbol changes due to a name change are regarded as price neutral. There is no adjustment made to historic share price or volume. A company may choose to change its name simply as a rebranding exercise to update its image. Examples include when AOL became Time Warner and when Totalizer became International Business Machines (IBM).

Mergers or acquisitions are often regarded as a positive change. The ticker of the acquired company generally becomes the ticker of the acquirer. Existing stock in the acquiree may be exchanged for stock of an equal value in the acquiring company or you may recieve the cash equivalent of your shares. When a merger occurs an adjustment factor will need to be applied to historic stock prices. These function in a similar way to stock splits but do not require any adjusment to volume. A split ratio is calculated and used to multiply all historic prices.

Another reason for changes to symbols is delisting or bankruptcy filing. This is regarded in a negative light. If the value of stock in a company begins to fall the company may eventually be delisted from the exchange. Each exchange has its own rules regarding the delisting process but generally when a stock becomes a penny stock or trades below \$1 per share the company can no longer be traded publicly. The ticker will be suffixed by a .pk, .ob or a .otcbb. The pk indicates that the stock is now available on the 'pink sheets', whereas the ob or otcbb means that the stock is now traded on the over-the-counter bulletin board. The NASDAQ exchange has a special case of ticker symbol changes in listings up to Jan 2016. They added a Q to the ticker for bankruptcy and an E for delinquent Securities and Exchange Commission (SEC) filings. This practice has now been discontinued but may show in historic data.

## Next Steps

In subsequent articles we will consider various equities data providers and determine how straightforward it is to obtain and analyse data from these vendors.