The nominal value, or book value, of a share, is usually assigned when the stock is issued. Also called the face value or par value, the nominal value of the stock is its redemption price and is normally stated on the front of that security. It's the stated value of the security, as opposed to the market value of the security. The market value of a security reflects what the market is willing to pay for it.
Economists look at the difference between nominal values, or the unadjusted rate or current price, that doesn't include inflation or other factors, versus real values, in which adjustments are made for inflation and other general price level changes over time.
These two values—nominal and real—may differ tremendously as a result of different market conditions, as well as supply and demand. As soon as the stock is issued, the market begins trading shares to new investors, and the price often fluctuates wildly. It's important for investors to understand the difference in price and to look at that difference relative to their valuations on the particular stock.
- The nominal price of a security is its stated value, its redemption price, or its unadjusted price, without taking into account 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 values may be issued arbitrarily to common stock and recorded on a company balance sheet. These funds are invested directly in the company that issued the stock as a means of infusing cash into the business. The stock represents ownership of a piece of the company. Preferred stock may have a specific nominal value that also reflects an amount the company owes the shareholder at a later date. Common stock may be more likely to lose value relative to preferred shares and may have a bigger spread between the nominal and market value.
With the impact of inflation or deflation, the nominal value may have little relationship to the real value when the shares are sold. These economic forces may impact the stock differently than the actual assets of the company, so even as balance sheet values change, the market value of the stock may be substantially different.
The nominal value of the common stock will usually be far less than its market value as a result of supply and demand factors; the nominal value of the preferred stock is usually more consistent with its market value.
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 publicly available data. Current market values are available from stock exchanges and a wide variety of online sources.