The nominal value of a stock is a price used for balance sheet purposes when a company is issuingshares. Also called the face value or par value, the share's nominal value is primarily for legal or accounting purposes and has little relation to the security's market value. The market value of a security reflects what the market is willing to pay for it. The real value is its market value or the price when adjusted for inflation and other factors affecting its worth over time.
These two stock values—nominal and real—may differ tremendously given different market conditions, the company's prospects, and the effects of supply and demand. As soon as the stock is issued, the market begins trading shares to new investors, and the price fluctuates. It's important for investors to understand the price difference and to consider it relative to their valuations of the particular stock.
Key Takeaways
- The nominal price of a security is its stated value, redemption price, or unadjusted price without considering inflation and other factors.
- The real value of a security is its market value or an adjusted price that accounts for price level changes that have occurred over time.
- To determine the difference between the two numbers, simply subtract the smaller number from the larger number.
Nominal Value and Real Value in Economics
Economists use the terms “nominal” and “real” to discuss financial value. In this context, “nominal” refers to the value of something—a bond, a commodity, your income, or the entire gross domestic product of a country—that fails to account for changes in its purchasing power. The “real” value adjusts the nominal value for these changes.
For example, you take a job where you are promised that when hired, meeting certain benchmarks, you’d receive a 10% raise each year in base salary. But it makes quite a difference if your employment contract specifies whether the 10% change is nominal or real: if it’s the former and inflation is at levels from the late 1970s or after the pandemic, the real value of your salary may be increasing far less than 10% a year and, perhaps, isn’t a raise at all if it fails to keep up with the cost of living.
Nominal Value of Stock
For stocks, the nominal value refers to the legal or accounting value recorded on a company's balance sheet. This number is usually set low, perhaps no more than a dollar, and it's primarily used for legal and accounting reasons, rather than to indicate the stock's market value. The funds from the nominal value are invested directly in the company to infuse cash into the business. The stock represents ownership of a piece of the company.Preferred stockmay have a specific nominal value that also reflects the amount the company owes the shareholder at a later date.
This differs from discussing the nominal rate of return on a stock, which takes the nominal value in its normal economic meaning: the return on a stock without adjusting for inflation. In periods of inflation or deflation, the nominal rate of return may differ considerably from the real rate of return. Suppose you invest in company shares reporting a steady 8% nominal annual return, which seems like a solid investment. But to get a more accurate picture, you need to consider the real return after accounting for inflation. For example, if the U.S. were experiencing a 5% annual inflation rate, the purchasing power of your return from the stock would be eroded by that percentage each year, dropping to 3%.
The nominal value of common stock ordinarily will be far less than its market value as a result of supply and demand, while the nominal value of the preferred stock, usually set higher, is generally more consistent with its market value.
Real Value of Stock
The real value of a security is its market value or worth after considering inflation and other factors that have occurred over time. Investors’ perceptions and calculations of a company’s prospects largely influence the market value. This can be determined by looking at price-to-earnings, enterprise value-to-earnings before interest, taxes, depreciation, and amortization and then comparing these results to the stock’s historical levels and peer groups.
If investors think the company has better prospects than the market gives it credit for, they will buy its stock. When there are more buyers than sellers, the market value increases. The market value of stocks is easily obtained. It is reflected on a per-share basis in the share price and the company’s market capitalization.
The market value can fluctuate enormously. Generally, stocks will fall out of favor in the run-up to a recession and rise in value during periods of economic expansion. Cyclical stocks tend to bounce around in value as their prospects are closely tied to the state of the economy. Defensive companies, on the other hand, are likelier to display more consistent valuations.
Calculating the Difference
To calculate the difference between nominal and real values, simply subtract the lesser value from the higher. The nominal value may be listed on the share or obtainable from the stock market on which it trades. Current market values are also available from stock exchanges and a wide variety of online sources.
Example of the Difference Between Nominal and Real Values
ABC Corp., a producer of educational materials for schools, issues shares to raise capital. Before the stock goes on the market, the company must declare a base legal priceat which it will sell its shares, also called its par or nominal value. ABC sets this number at $1. Once trading begins, the company successfully sells 500 million shares at $3 each, a market price substantially higher than the nominal value of $1.
However, the company's early momentum doesn't last. A few weeks into trading, ABC Corp., began falling short of investor expectations, causing the market price of its shares to drop to $1.75. Over the following months, the share price goes through significant volatility, swinging between $1 and $2.
For some time, ABC Corp.'s shares traded at a price close to its nominal value and below its initial public offering (IPO) price of $3. Then, a game-changing moment occurred: news broke of a significant contract with the U.S. Department of Education. This success pushed the shares' market value to $4 each. Now, ABC Corp. has a real value of $4 per share, 33% higher than its IPO price and a staggering 300% above its nominal value of $1.
How Do You Calculate the Nominal Value of a Stock?
The par or nominal value of issued shares is listed in the shareholder equity section of a company’s balance sheet. Stock certificates should also have this value.
What Is the Difference Between Nominal Value and Real Value of Shares?
The nominal value of a company's stock is a value assigned when it is issuingshare capital. It is the lowest limit set to the value of a share of stock and has nothing to do with the real value, which is the price at which the shares are traded.
How Do You Calculate the Real Value of a Stock?
The real value of a stock is its market value. Market value can be expressed in terms of each share of stock, which is reflected in the share price, or as whole, which is reflected in the company’s market capitalization.
The Bottom Line
The nominal value of shares is the minimal price they can be sold for during the initial issuance. It is a value assigned for balance sheet purposes and has little to no bearing on the price the stock can be bought or sold for today.
For investors, the value that matters is the present one that reflects the current situation. The real or market value reflects what investors will pay based on past and present financials and forecasts. This value almost always differs from the nominal value and is constantly changing.
