Nominal data is defined as information that cannot be measured quantitatively. Instead, this type of data is often used to form groups of categories when analyzing data.
From a financial standpoint, nominal data is the stated value of something, which may not equate to its real value. This is most often seen with interest rates, startup company valuations, and publicly traded asset value analysis.
To better understand this term, consider this simple example. You cannot mathematically say that Thomas is greater or lesser than Timothy. However, you can categorize these two names separately to determine which one is more prevalent in the data you’re analyzing.
How does nominal data relate to interest rates?
The nominal interest rate is the rate of interest that has not been adjusted for inflation. For example, if you’re earning 5% interest annually on a $100 asset, that asset will be worth $105 after one year.
However, financial markets and the media often reference inflation-adjusted numbers. As nominal interest rates don’t account for inflation, the actual, real value of your asset differs based on changes in buying power.
Consider the following example. If you put aside $100 into savings, bonds or other assets, you would have $100 in real buying power at the time you put the money away. After some time, however, that buying power may change. If inflation is 5% during the time that you’ve kept the money set aside, and you’ve earned no interest to increase the total, your actual, real buying power is reduced by the amount of inflation. You will therefore only have $95 in buying power after adjusting for inflation.
In a similar vein, say a fictitious loaf of bread costs $100 when you put your money into savings. But then the cost of it rises 5% in line with a rise in inflation. You can no longer buy one full loaf of bread with the $100 you set aside.
How does nominal data relate to startup companies?
Nominal value is often referred to as “face value” for startup companies. In some states, when a new corporation is formed, it must declare a minimum price for its stock. This is also referred to as “par value” in some states, and it’s the lowest minimum amount the company’s stock can sell for.
Founders of a new corporation may declare this amount to be fractions of a cent. By implication, they will be able to provide themselves with an optimal price point of their own shares. They may also be able to avoid tax liabilities at a later time. However, it’s important to note that this has nothing to do with the actual valuation of a company; it is simply required for specific corporation filing and accounting purposes.
How does nominal data relate to stock prices?
In publicly held companies, you can determine the nominal value of the company’s shares by dividing paid share capital by the number of outstanding shares. The nominal value does not normally equal the market value.
Paid in capital refers to the amount of cash or other funding actually received in the primary market. This number is often available as a line item on the company’s balance sheet. Outstanding shares are not authorized shares, but rather those that have actually sold.
Nominal data is data that cannot be measured. Nominal value refers to a value that exists in name only, which may or may not translate to its real value. The real value of something is what the market is willing to pay. This is why inflation reduces buying power while investor enthusiasm increases market value.
