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How is a Notional Value Different from the Market Value?

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The terms notional value and market value are often used interchangeably. However, when we get down to the nitty-gritty of it all, both are very distinct and unique. This is why it is crucial to understand the difference between notional and market value when it comes to investing for investors. 

Here, we will take a look at everything you need to know about what is notional value, what is market value, notional value vs market value, etc. to help you understand the terms better. 

What is Notional Value? 

The term notional value is usually used to represent the hypothetical value of either an asset or a contract in financial markets. Notional value is commonly used during trading in derivatives where it represents the underlying value of a contract or instrument. This is done without taking into consideration market fluctuations or actual transactions.

Think of the notional value as a point of reference that helps investors calculate payments or determine a position’s size and the risk it holds. 

What is Market Value?  

The market value in the financial markets represents the current price at which a particular asset or security can be bought or sold. The market value is determined based on the supply and demand of the asset. Other factors like economic conditions, the performance of the company and investor sentiment also influence the market value of an asset.

Market value is a real-time reflection of the asset value, determined by actual market transactions. With the help of the market value, investors and traders can assess an asset’s fair value and decide whether to buy or sell the asset in question.

Additional Read: What is Face Value in Share Markets?

How To Measure The Notional Value and Market Value?  

Examples of Notional Value and Market Value  

Let us have a look at a couple of examples of both notional and market values:

The Value 

Examples

Market Value

Suppose you invest in the S&P BSE Sensex Index futures contract. Now, a single contract has 250 units and a market value of ₹3000 each. 


Here the market value of a single unit is ₹275. 

Notional Value

In the same example, the notional value of the index futures contract can be calculated as ₹3000 x 270 units = ₹8,25,000.

Differences Between Notional Value and Market Value  

Listed below are some of the main differences between notional value and market value

Aspect

Market Value

Notional Value

Definition

The market value is the current price of an asset in a financial market

The notional value represents the theoretical value of an asset in a contract or investment

Application

Market value helps investors determine the worth of an asset in real-time

The notional value determines the value of the position taken in a financial instrument

Calculation

The market value is calculated based on the prevailing market prices

The notional value is calculated according to the contract specifications and terms

Uses

Market value is used to make informed investment decisions and determine portfolio valuation

Notional value is used to help with risk management, leverage assessment and fee calculation

Instruments

Financial instruments like stocks, real estate, and publicly traded assets are associated with market value 

Financial instruments lie derivatives, and leveraged trading instruments are associated with a notional value

Influence

Market value can be influenced by factors like market conditions and investor sentiment

Notional value is essentially a reflection of the transaction size rather than the actual capital invested

Importance

Market value is a crucial element for both investors and analysts

Notional value works best for risk managers, traders, financial institutions

Nature

Is dependent on factors like supply and demand along with several economic factors and can fluctuate with changes in them

Notional value usually remains static unless there are any changes in the contract.


Additional Read: What is GIFT Nifty?

Conclusion 

Sometimes the concepts of notional and market values can seem confusing but understanding both these terms is a necessity for traders. This, in turn, can help investors make informed investment decisions and manage their portfolios in a better manner. 

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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Frequently Asked Questions

What is notional value in trading?

Answer Field

The term notional value is usually used to represent the hypothetical value of either an asset or a contract in financial markets. Notional value is commonly used during trading in derivatives.

How is market value different from notional value?

Answer Field

The market value in the financial markets represents the current price at which a particular asset or security can be bought or sold. The market value is determined based on the supply and demand of the asset.

Why is notional value important in derivatives trading?

Answer Field

In derivatives trading, the notional value represents the underlying value of a contract or instrument. This is done without taking into consideration market fluctuations or actual transactions. With the help of this, investors can calculate payments or determine a position’s size and the risk it holds. 

Can notional value affect market risk?

Answer Field

It can, as it helps investors manage market risks better.

What factors influence the market value of an asset?

Answer Field

Market value can be influenced by factors like market conditions and investor sentiment.

Is notional value used in stock market analysis?

Answer Field

Notional value can be used in stock market analysis as it helps with assessing portfolio risk and can help calculate hedge ratios that could help offset such risks.

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