The world of stock trading is indeed unique. It enables you to create a corpus and fulfil your personal and financial goals. But to be able to create this corpus, you need to have a thorough understanding of this unique world. As such, to truly profit from your investment, you need to familiarise yourself with the various jargons, technical terms, and stock market specific vocabulary before you begin investing. When it comes to stock trading, notional value, and market value are two of the most commonly confused terms. This article highlights the difference between notional value and market value. Read on to find out
What is a notional value?
The best way to compare notional value vs market value is to understand the individual definitions of both the terms. Notional value describes the value of an asset as a whole. It is the difference between the amount you pay for an asset on the market and the amount you are investing, i.e. the sum of money associated with the entire transaction. Notional value is simply the total value of the asset, which is hidden behind its spot price. It is calculated by multiplying the units in a contract, by its spot price.
Notional value is primarily employed in various ways to suit traders. While it may be used in stocks and futures, it is more often used during equity options, interest rate swaps, total return swaps, as well as exchange-traded funds, foreign currency derivatives and foreign currency exchange.
What is market value?
To be able to compare the notional vs market value, it is just as essential to understand the meaning and definition of market value. Market value is simply the price of a security, which is agreed upon by buyers and sellers in the market place. To calculate the market value of a given security, traders determine its supply and demand. The market value of a company serves as a good indicator of its investors’ perceptions about its business prospects. A company’s market value can fluctuate enormously over various periods as it is influenced substantially by the different business cycles. As such, the market value can plunge in a bear market and rise during a bull market.
Notional vs market value – Basic differences
The fundamental difference between notional value and market value is as under:
- While the notional value determines the total value of the security, based on contract specifications, the market value is essentially the price of a single unit of security.
- The notional value highlights the total value of assets which includes options, futures, stocks, foreign exchange, etc. In contrast, the market value is simply the security you pay for the total assets in the market.
- The notional value indicates the total value of a financial security’s position while the market value signifies the security’s marketplace value as determined by buyers and sellers.
Example distinguishing market value vs notional value
Let us assume that you invest in the S&P BSE Sensex Index futures contract. A single S&P BSE Sensex Index futures contract comprises of 250 units. Now, each Index future comes with a market value of 3000 per unit. In this equation, the market value of a single unit is Rs. 275, whereas the notional value of the index futures contract is calculated as Rs.3000 x 270 units = Rs. 8,25,000.
Notional and market values represent the different sums that investors should understand if they intend to trade the markets regularly. To know more about notional vs market value, you can reach out to our team of investment advisors at Angel One.