What is Nominal Value?
Nominal Value is a term used in accounting and finance to refer to the stated or face value of a security, such as a stock or bond. This value is established by the issuer and is typically printed on the certificate. It generally does not reflect any market value or worth of the security in question but rather represents its face value given by the issuing entity. Nominal Value can also be referred to as Par Value, Face Value, or Stated Value.
Importance of Nominal Value
Nominal values are important for helping investors understand how their investments are performing over time because it provides a consistent reference point for measuring changes in market prices relative to par values. This makes it easier to compare different securities and make informed investment decisions based on relative performance instead of absolute performance numbers from one period to another.
In addition, many companies use nominal values when issuing new securities to set future redemption prices for those securities at par value and also ensure that investors receive their money back at least at their original purchase price should they choose to redeem their securities early.
Nominal Value vs Real Value
The difference between nominal value and real value is significant when evaluating investments. Nominal value refers to the face value of an asset, such as the cost of a stock or bond at the time of purchase. Real value involves calculating inflation, taxes, and other cost associated with purchasing an asset to determine its true worth. For investors, it's important to look deeper than a security's nominal value when evaluating whether it is a wise investment - understanding its real value can provide valuable insight into what kind of return might be expected on the money invested.