What is the nominal value of shares and how to calculate it?

If you are one of the individuals who are interested in the stock market and investing in the stock market, you have probably already heard the term par value of shares. But what is the par value of shares and how do you calculate it? What does this face value represent and what is the difference between the face value and the real value of a stock? In this article, we will explain why the nominal value is important in stock market investing and how to understand and interpret it.  

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What is the nominal value of shares and how to calculate it?

What is the par value of shares on the stock market?

Let's remember that in economic terms, the nominal value corresponds to the value of a good or a piece of furniture on the market at different times. This nominal value therefore does not take account of inflation. It is thanks to this nominal value that we can observe the evolution of certain aspects over time. For example, in the case of the property market, the nominal value makes it possible to assess the difference between the price of property in this year and 10 years ago.

But in finance, par value refers to the value of a security at the time the share was issued. In short, the par value is the starting value of the share when it is first listed on the stock exchange.

Thanks to the nominal value, which is the starting value of the share on the stock exchange, it is possible to calculate the different evolutions according to different factors such as the annual results of a company or the stock exchange value. In this way and thanks to this calculation, the face value of the share will be revised upwards or downwards over the years.

The nominal value of a share can also be explained by defining it as the value of each share of the company issued. The value of the share therefore moves according to supply and demand and can change several times without taking the time factor into account. While the par value of a share will depend mainly on the moment in time when it is calculated, the value of a share is not always the same.

 

How to calculate the nominal value of shares?

In order to calculate the nominal value of a share, shareholders must take into account the number of shares issued by the company. It will be sufficient to divide the total value of the share capital by the number of shares determined by the interested parties. This is important because shareholders receive their dividends according to the shares they have previously purchased.

Thus, to summarise, the calculation used to define the nominal value of a share, remembering that the amount of the nominal value is equivalent to the capital divided by the number of shares.

For example, a listed company has €5,000 of capital divided into 500 shares. The par value of each share is then €10. This means that the 500 shares can be distributed among the founders of the company or opened to other investors through the stock exchange. As the number of shares increases, the nominal value of that share decreases. And conversely, when a number of shares is reduced, their nominal value increases.

To better understand the nominal value of a share, it is possible to relate this example to the example of bank notes. So if you can buy 4 loaves of bread with €5 today, you may only be able to buy 2 loaves in 10 years' time. Their face value of money will not change and €1 will still be €1. What will change is the weight of this euro on the economy. The weight of this euro corresponds to the real value.

When investing in the stock market, investors use the nominal value of a share to calculate its return.

 

What is the difference between the nominal value and the real value of a share?

Many novice stock market investors confuse the real value and the nominal value of shares. In reality, however, these two values are not identical. The calculation for the nominal value and the real value of a share is also different.

The nominal value is the value of a share by dividing the share capital by the number of shares issued, which gives the nominal value of each share.

The nominal value is therefore different from the price of a share. It should be remembered that the share price is the amount paid when a certain share is acquired on the stock market. This price is itself influenced by another set of aggregate variables, including supply and demand in the markets themselves.

The par value is the value of a single ordinary share determined by the charter of a listed company. This value is not usually associated with the real value of the shares. In most cases, the nominal value of a share is lower than its real value. When a certificate is issued for the shares acquired, it is required to state the nominal value. Similarly, when a company authorises the issue of shares, it has the choice of whether or not to attribute a nominal value to these securities. When you take part in an IPO, for example, or buy a share in a company, you will have the par value clearly stated on your certificate of acquisition. 

 

What is the nominal value of a bond?

Although the concept of the nominal value of a share on the stock exchange is relatively simple to understand, the nominal value of a bond is somewhat more complex.

This face value is actually the exact accounting amount allocated to the debits at the time of credit. The sum is thus divided into more coupons to give the nominal value of the bond. It is these small shares that will facilitate trading in the market in the event of a move.

But in the bond market, the nominal value also has another function as it allows the interest rate of the bond to be recognised. Thus, based on all factors including supply and demand, but also issues, the account manager will be able to define the final redemption amount from the par value to the major.

Frequently Asked Questions

What is a share without par value?

As we have seen on this page, the par value of a share is the value per share assigned by the issuing company and is usually set at a low amount. There are also shares without par value. More precisely, a no-par value share is a share that is issued without any designated minimum value.

Why do companies reduce the par value of a share?

When a listed company makes losses, it will aim to reduce its share capital. This is done by reducing the shareholding of the partners or shareholders without repaying their shares, i.e. by reducing the nominal value of the shares or by reducing their number. Setting a low nominal value for a share also allows more shares in the company to be sold.

Who decides on the nominal value of a share?

As mentioned above, the nominal value of a share can change over time. It can go down as well as up over the years. It is the shareholders of the listed company who take this decision at an Extraordinary General Meeting, which is held in addition to the Ordinary General Meeting to vote on the dividend of the company's shares.

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