Notional Value and Market Value: Are They Basically the Same?

If you are just entering the market and the world of trading, it is likely you have not yet learned all of the technical vocabulary in order to proceed with investing. For your investments to be profitable and your career as a trader to be as successful as possible, there is a certain amount of Trading101 that is necessary for you to pursue. Here are the main differences between notional and market value.

1. General difference

If we were to find the most prominent, basic difference distinguishing notional from market value, it would be this. While notional value illustrates the complete value of your assets, including options, foreign exchange currencies, futures, stocks and forwards, market value is the security that you pay for these assets within the market.

2. Notional value

Again, the notional value better describes the value of assets as a whole, making a distinction between the amount that you pay on the market and what you are actually investing. It is the total value that is hidden behind an asset’s spot price. Notional value is employed in several ways to convenience traders. Of these, the most popular are through foreign currency exchange derivatives, total return swaps, equity options, interest rate swaps, and exchange traded funds.

A good way of illustrating what the notional value of an asset is, would be by describing an investment in a futures contract in gold. If a trader had to pay the amount of 200 ounces of gold for the contract, and gold futures were running at $1,000 at the time, the notional value of this investment would be ounces of gold multiplied by price of gold futures: $200,000.

3. Market value

When we speak of market value, however, it is seen as the more straightforward price of assets that is determined within the market. Traders purchasing and selling their assets are the people who decide on market value, but not on their own. Market value is decided based on the asset’s supply and demand.

The market value proposed is a good sign of what traders and investors believe is yet to come for an asset. This is to say, whether a security it has potential for a successful future on the market or not. The market value is much more flexible than notional value, changing regularly depending on supply, demand, and other prospects a security may hold. Market values may range anywhere from under a million dollars to hundreds of billions of dollars when it comes to the more powerful companies that are strongly rooted within the market.

Depending on what is occurring with the business cycle, market value may drop drastically or reach heights never seen before. Bear markets are usually seen during recessions and make the market considerably drop, while bull markets are what investors call the market during a rise of economic expansion.

Conclusion

The difference between notional and market value is relatively simple. Notional value refers to what you are investing combined with the value of the security you are investing in. This is calculated by multiplying your investment and the price that the asset is currently running at. Market value, on the other hand, is simply the value that a security, or company, holds on the market. This value is determined by those investors and traders performing transactions on the market as well as the security’s supply and demand.