Difference Between Notional Value and Market value

Stock trading is a unique world. This allows you to build a corpus, and achieve your financial and personal goals. To be able create this corpus you must have a good understanding of the unique world. Before you invest, it is important to be familiar with technical terms and stock market terminology. Two of the most confusing terms in stock trading are notional value and market value. This article will explain the differences between market and notional value. Continue reading to learn more.

What's a notional value?

Understanding the differences between market and notional value is the best way to determine which one you are referring to. The value of an asset in its entirety is called notional value. It is the difference in the price you pay for an asset and the amount that you invest. The total amount of money involved in the transaction. The asset's total value, hidden behind its spot value, is called the nominal value. It is calculated by adding the units to a contract and multiplying it by its spot market price.

In order to make it more attractive to traders, notional value is used in a variety of ways. It can be used in futures and stocks, but it is most often used during equity options and total return swaps.

What's the market value?

It is important to know the meaning and definitions of market value in order to be able compare notional vs. market value. The market value of a security is the price at which buyers and sellers agree to purchase it. Market value is determined by traders who determine the supply and demand for a security. Market value is a measure of investors' views about a company's business prospects. The business cycles and fluctuations can cause a company's market price to fluctuate greatly over time. The market value of a company can plummet in a bear market or rise during a bull.

Market value vs. notional - Basic differences

Below is the fundamental difference between market and notional value:

1. Based on contract specifications, the notional value will determine the total security value. However, the market value is the price for a single security unit.
2. The notional value is the sum of all assets, which can include options, stocks, futures, and foreign exchange. The market value, on the other hand, is the price you pay for all assets in the market.
3. The notional value represents the total value of a financial securities position, while the market value is the security's marketplace value as determined and measured by buyers or sellers.

An example of distinguishing market value from notional value

Let's say you decide to invest in the S&P BSE Sensex Index Futures contract. 250 units make up a single S&P BSE Sensex Index Futures contract. Each Index future has a market price of 3000. This equation shows that a single unit has a market value of Rs. 275. The notional value for an index futures contract is Rs.3000 x 277 units = Rs. 8,25,000

Conclusion

Investors should be able to distinguish between market and nominal values if they plan on trading the markets frequently.