The main difference between Notional Value and Market Value is that Notional Value represents the total value of a financial instrument based on the underlying asset, while Market Value is the current price at which the asset can be bought or sold in the market.
Content:
Notional Value Meaning
Notional Value is the total value of a financial instrument based on the quantity of the underlying asset and its price. It is often used in derivatives like options or futures to represent the size of the contract without reflecting the actual cost or market price.
For example, if an options contract gives the right to buy 100 shares of a company at ₹500 per share, the Notional Value of that contract is ₹50,000. This value helps investors understand the scale of the exposure they have in the market, even though they may not be paying or receiving this amount directly.
Example Of Notional Value
The concept of Notional Value can be illustrated with a simple example. Suppose you have a futures contract for 100 grams of gold, and the price of gold is ₹5,000 per gram. The Notional Value of this futures contract would be ₹5,00,000 (100 grams x ₹5,000 per gram).
This Notional Value represents the total value of the gold covered by the contract, even though the actual amount you invest may be much smaller, such as the margin requirement for entering the contract. It’s important to note that the Notional Value is used to assess the size of the exposure, not the market price or the actual investment amount.
Market Value Meaning
Market Value refers to the current price at which an asset or security can be bought or sold in the open market. It reflects the perceived worth of the asset based on supply and demand, investor sentiment, and overall market conditions at any given time.
Market Value is dynamic and can fluctuate frequently as it is influenced by various factors such as economic indicators, company performance, and investor behavior. It is an essential measure for investors as it represents the price at which they can actually trade the asset, unlike Notional Value, which is a theoretical figure.
Example Of Market Value
To understand Market Value, consider a situation where a company’s shares are traded on the stock exchange at ₹1,000 per share. If an investor owns 100 shares of this company, the Market Value of their investment is ₹1,00,000 (100 shares x ₹1,000 per share).
This Market Value indicates the current worth of the investor’s shares in the market. If the share price rises to ₹1,200, the Market Value of the same 100 shares would increase to ₹1,20,000. This value changes as the market price of the shares fluctuates.
Notional Value Vs Market Value
The main difference between Notional Value and Market Value is that Notional Value represents the total value of the underlying asset in a financial contract, whereas Market Value is the actual price at which the asset or security is currently traded in the market. Other differences include:
| Parameter | Notional Value | Market Value |
| Purpose | Represents the scale of the financial contract | Reflects the actual trading price of the asset |
| Calculation | Based on the quantity of the underlying asset multiplied by a fixed price | Determined by current market conditions and demand |
| Relevance | Used in derivatives to understand exposure | Important for making buying or selling decisions |
| Fluctuation | Generally remains constant for the contract’s life | Changes frequently based on market forces |
| Application | Relevant in assessing the size of financial positions | Crucial for evaluating the real-time value of assets |
Difference Between Notional Value And Market Value – Quick Summary
- The key difference is that Notional Value represents the total value of the underlying asset in a financial contract, while Market Value is the current price at which the asset trades in the market.
- Notional Value is the total value derived from the quantity of the underlying asset and its fixed price, used primarily to assess the size of financial contracts like derivatives.
- For example, if you have a futures contract for 100 grams of gold at ₹5,000 per gram, the Notional Value is ₹5,00,000, representing the contract’s total exposure.
- Market Value refers to the current trading price of an asset or security, influenced by market conditions, supply and demand, and investor sentiment.
- For instance, if a company’s shares trade at ₹1,000 per share and you own 100 shares, the Market Value of your investment is ₹1,00,000, reflecting its current worth.
- Notional Value represents the contract’s scale and remains constant, while Market Value reflects real-time asset prices and fluctuates with market dynamics.
- Invest in stocks, mutual funds and IPOs at no cost with Alice Blue.
Notional Value Vs Market Value – FAQs
The main difference between Notional Value and Market Value is that Notional Value represents the theoretical total value of a financial contract, while Market Value is the current price at which the asset is traded in the market.
Notional Value refers to the total value derived from the quantity of an underlying asset and its agreed-upon price in a financial contract, primarily used to assess the size of derivatives like options and futures.
To calculate Notional Price, multiply the quantity of the underlying asset by the agreed-upon price per unit. For example, 100 shares at ₹50 per share would have a Notional Price of ₹5,000.
A company’s Market Value is the current trading price of its outstanding shares multiplied by the total number of shares. It reflects what the market believes the company is worth at a specific point in time.
Market Value is calculated by multiplying the current price per share by the total number of outstanding shares. For example, if a share trades at ₹100 and there are 1 million shares, the Market Value is ₹100 million.
Notional Value is important because it helps investors understand the scale and exposure of financial contracts, particularly in derivatives. It provides a measure of the potential impact of price movements on the overall contract value.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:
