Definition: Nominal Price
Nominal price serves two primary definitions in finance:
- A minimal price fixed predominantly for the sake of having some consideration for a transaction. This nominal price often bears no direct relation to the true market value of the item.
- The price assigned to a security at the time it is issued, also known as the face value, nominal value, or par value. This value remains constant and does not reflect fluctuation in the market price. For example, XYZ plc 25p ordinary shares may have a nominal price of 25p, even though their market value might differ.
The nominal value is crucial as it represents the maximum amount a shareholder may be required to contribute to the company in case of liquidation or other financial needs.
Examples
-
Minimal Transaction Price: In a real estate transaction, a property may have a nominal price listed at $1 solely to signify a transfer of ownership, without considering the actual market valuation of the property.
-
Par Value of Shares: A company’s issued shares might have a nominal price of $1 per share. Despite this nominal value, the shares may trade in the market at a much higher price, such as $50, reflecting investor demand and overall market conditions.
Frequently Asked Questions (FAQ)
What is the difference between nominal price and market value?
Nominal price is the price at which securities are issued or the price fixed for transaction purposes, usually stating a formal consideration. Market value refers to the current price at which an asset or security can be bought or sold in the market, reflecting supply and demand dynamics.
Why do companies issue shares with a nominal price?
The nominal price, often termed as the par value, provides a legal minimum amount per share that signifies the maximum liability of shareholders towards the company. It’s mainly for legal and accounting purposes rather than reflecting the actual market value of the shares.
Can nominal price change over time?
No, the nominal or face value of a security typically remains constant for legal and accounting records. However, the market value fluctuates based on various market conditions and investor perceptions.
How is nominal price used in financial statements?
Nominal price is often listed on the balance sheet under shareholders’ equity and details the par value of the issued stock. It helps in distinguishing the nominal capital of the company from its additional paid-in capital.
Related Terms and Definitions
- Face Value: The nominal or legal value of a security as stated by the issuer.
- Market Value: The current price at which an asset or security is bought or sold in the market.
- Par Value: Another term for nominal or face value of securities, especially in bonds and stocks.
- Book Value: The value of an asset according to its balance sheet account balance.
- Intrinsic Value: The actual worth of a security based on an underlying perception of its value.
Online Resources
- Investopedia - Nominal Value
- Corporate Finance Institute - Nominal Value Definition
- NASDAQ - Nominal Value
Suggested Books for Further Studies
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Financial Management: Theory and Practice” by Eugene F. Brigham and Michael C. Ehrhardt
- “Corporate Finance” by Jonathan Berk and Peter DeMarzo
Accounting Basics: “Nominal Price” Fundamentals Quiz
Thank you for enhancing your accounting knowledge with our detailed definitions and engaging quizzes! Keep up the excellent work in your financial studies.
