Nominal value
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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.
Advantages of Nominal value
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.
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.
Suggested literature
- Rosario, G. E., Rundensteiner, E. A., Brown, D. C., Ward, M. O., & Huang, S. (2004). Mapping nominal values to numbers for effective visualization. Information Visualization, 3(2), 80-95.
- Posternak, M., Baldereschi, A., Krakauer, H., & Resta, R. (1997). Non-nominal value of the dynamical effective charge in alkaline-earth oxides. Physical Review B, 55(24), R15983.
