What is the nominal value and how to differentiate it from the book value and market price?

When analyzing a stock, investors need to understand three fundamental valuation methods that, although related, offer completely different perspectives on the same asset. In this guide, we show you how to identify each one, when to apply them, and why their differences are crucial for making sound investment decisions.

The three pillars of valuation: fundamental definitions

Nominal value, which is the starting point for any stock, is obtained by dividing the company’s share capital by the total number of shares issued. It is the initial theoretical price established at the time of issuance. In the case of BUBETA S.A., with a share capital of €6,500,000 and 500,000 shares, the nominal value would be €13 per share.

Book value (or net asset value) reflects what the company truly owns from an accounting perspective. It is calculated by taking total assets, subtracting liabilities, and dividing by the number of shares. For MOYOTO S.A., with assets of €7,500,000, liabilities of €2,410,000, and 580,000 shares, the book value amounts to €8.78 per share.

Market price is the third in the trio: the actual amount at which the stock is bought and sold in the secondary market. It results from dividing the market capitalization by the number of shares issued. OCSOB S.A., with a market capitalization of €6.94 billion and 3,020,000 shares, has a market value of €2.30 per share.

When to use each method? Practical real-world applications

In daily trading: the market price is your compass

The market value is what you will constantly see on your investment platform. It represents the consensus between buyers and sellers in real time. If your strategy is to capitalize on short-term dips, such as META PLATFORMS trading at $113.02, you might place a limit buy order at $109.00 expecting a correction. This is the value you will operate with day-to-day, without necessarily indicating whether it is expensive or cheap.

In search of opportunities: value investing and book value

Investors following the philosophy of “buy good companies at a good price” rely on the book value. This approach aims to identify solid companies whose prices are below their book value. Comparing two utilities in the IBEX 35, if ENAGAS shows a Price/Book ratio lower than NATURGY, it suggests that the former is relatively cheaper relative to its net worth.

Nominal value: present but limited

The nominal value has very specific applications. Beyond its initial relevance, it appears in products like convertible bonds, where a predetermined redemption price is set (often expressed as a percentage of the stock’s historical average price).

How to interpret what each value reveals

The book value shows you “what it should be” based on balance sheet analysis: it reflects net worth per share. However, it notably fails with tech companies and small caps whose main assets are intangible. Creative accounting practices also hinder its accuracy.

The market price, on the other hand, shows you “what it is”: the market consensus at this very moment. But here’s the trick: this consensus is influenced by monetary policy announcements, sector-specific relevant news, changes in economic expectations, and even speculative euphoria without fundamental basis. The market discounts and sometimes overinterprets information.

The nominal value, as a theoretical starting point, has limited scope in equities because stocks do not have a fixed maturity. Its importance is greater in fixed income, where maturity ensures that the nominal is both the start and the end.

Comparative table: quick reference

Limitations you should be aware of

Each method has a Achilles’ heel. The nominal value quickly becomes outdated after initial issuance. The book value is distorted by companies with intangible assets or creative accounting. The market value fluctuates due to various factors such as interest rate changes or speculative movements, temporarily diverging from the company’s true value.

Conclusion: strategic integration

The key is not to choose one of these values as the absolute truth, but to use them complementarily according to your context. The market price is your daily operational tool. The book value helps identify potentially undervalued companies. Understanding what the nominal value is allows you to appreciate the origin of all these metrics.

A good investment is never reduced to a single ratio. Combine these methods, analyze the full context, and remember that quality information is your best ally to operate with confidence.