# Nominal value

Nominal value is the monetary value of a security, such as stocks or bonds, that is listed on a balance sheet. It is the face value of the security, which is printed on the certificate, as opposed to its market value.

The nominal value of a security is important in establishing the legal capital of a company, as it is the minimum amount of money that the company must have invested in its own stock. It is also used as a basis for calculating dividends and other distributions.

The nominal value of a security does not reflect its true or real value. It is possible for a security to have a nominal value that is much higher or lower than its market value, due to a variety of factors such as supply and demand, economic conditions, and other external forces.

Nominal value is also known as par value or face value. It is typically expressed on a per-share basis and is usually a small amount, such as \\$0.01 or \\$1.00.

## Example of Nominal value

An example of nominal value is a company’s common stock with a par value of \$1.00 per share. This means that the company has invested \$1.00 in its own stock, therefore establishing a legal capital base. Even if the stock's market value is much higher than \$1.00, the nominal value will remain at \$1.00.

In summary, an example of nominal value is a company’s common stock with a par value of \$1.00 per share. This establishes a legal capital base and the nominal value remains the same, even if the stock's market value is much higher.

## Formula of Nominal value

The formula for calculating the nominal value of a security is as follows:

Nominal Value = Total Number of Shares x Par Value Per Share

Where Total Number of Shares is the total number of shares outstanding, and Par Value Per Share is the face value of each share.

## When to use Nominal value

Nominal value is typically used when assessing the legal capital of a company. It is also used to calculate the dividends or other distributions that the company will pay out. In addition, it is important to understand the nominal value of a security when investing in stocks or bonds, as it provides a basis for determining the value of the security.

It is important to note that the nominal value of a security does not necessarily represent the current market value of the security. The market value of a security can be much higher or lower than its nominal value, due to a variety of factors, such as supply and demand, economic conditions, and other external forces.

## Types of Nominal value

Nominal values can be classified into two main types: par value and no-par value.

• Par value: Par value is the stated value of a security, which is printed on the certificate. It is the nominal value that is used to calculate dividends and other distributions.
• No-par value: No-par value is a security that does not have a stated value printed on the certificate. Instead, the market value of the security is used to calculate dividends and other distributions.

## Steps of Nominal value

The steps of calculating nominal value include:

• Determining the number of shares authorized: The first step is to determine the number of shares authorized by the company. This is the maximum number of shares that can be issued by the company.
• Setting the par value: The next step is to set the par value or nominal value of the shares. This is the face value of each share, which is typically a small amount, such as \$1.00 or \$0.01.
• Calculating the total capital: The total capital is then calculated by multiplying the number of shares authorized by the par value.
• Allocating the capital among the shareholders: The total capital is then allocated among the shareholders, typically in the form of dividends or other distributions.

There are several advantages of nominal value:

• It establishes a legal capital of the company, which is the minimum amount of money that the company must have invested in its own stock.
• It acts as a starting point for measuring the financial performance of the company.
• It is used to calculate dividends and other distributions.
• It provides a reliable basis for the valuation of securities.

## Limitations of Nominal value

Nominal value has a few significant limitations. These include:

• It is not reflective of the true market value of the security, which can be impacted by a variety of factors.
• It is not an indicator of the company’s financial health as it does not reflect the company’s earnings or cash flow.
• It does not account for inflation or changes in the economic environment.

## Other approaches related to Nominal value

There are several other approaches used to measure the value of a security. These include book value, intrinsic value, and market value.

• Book value is the total assets of a company minus its total liabilities. It is also known as shareholder's equity or net worth. It is calculated by subtracting the liabilities from the assets of a company. It is used to measure the financial strength of a company and is used to determine the fair market value of a company's stock.
• Intrinsic value is the actual value of a security, as determined by an investor's assessment of its underlying fundamentals. It is the value of a security based on its fundamental characteristics, such as earnings, dividends, volatility, and growth potential.
• Market value is the current price of a security, as determined by the forces of supply and demand. It is the most commonly used measure of a security's value and is the price that an investor is willing to pay for a stock or bond.

In summary, there are several approaches to measure the value of a security, including book value, intrinsic value, and market value. Book value is the total assets of a company minus its total liabilities and is used to measure the financial strength of a company. Intrinsic value is the actual value of a security, as determined by an investor's assessment of its underlying fundamentals. Market value is the current price of a security, as determined by the forces of supply and demand.