What is Nominal Value and Its Importance

Nominal value is the written or officially designated value of a financial instrument, which differs from its actual market value. Its importance lies in being:

• A basis for accounting entries and capital calculation
• A standard for calculating bond interest regardless of trading price
• A legal reference for determining shareholder and investor rights
• A tool for financial analysis and performance comparison
• A determinant of the amount due at maturity

Example: A bond with a nominal value of 1000 SAR and 5% interest pays 50 SAR annually even if it trades at 950 or 1050 SAR in the market.

The Difference Between Nominal Value, Market Value, and Book Value

• Nominal Value: The value written on the financial instrument, fixed and predetermined
• Market Value: The current trading price, changes based on supply and demand
• Book Value: The accounting value in the balance sheet (Assets - Liabilities ÷ Number of Shares)

Example: A share with nominal value 10 SAR, book value 25 SAR, market value 40 SAR.

Importance: Nominal for legal accounting, market for investment, book for company valuation accounting.

How to Calculate and Determine Nominal Value

Determining Nominal Value:

• For Stocks: Set in the articles of incorporation (10 SAR in Saudi Arabia)
• For Bonds: Set at issuance (usually 1000 or 5000 SAR)

Calculating Total Nominal Value:

• Stocks: Number of shares × 10 SAR
• Bonds: Number of bonds × Nominal value per bond

Calculating Number of Shares from Capital:

Capital ÷ Nominal value = Number of shares

Example: Company with 50 million SAR capital = 5 million shares (50,000,000 ÷ 10)

Nominal Value in Financial Instruments (Stocks, Bonds, Bills of Exchange)

Nominal value in financial instruments varies by instrument type:

• In Stocks: Set at 10 SAR as a unified standard in Saudi Arabia, used to calculate capital and determine shareholder rights
• In Bonds: Set at issuance with values ranging from 1000-10000 SAR, serves as basis for calculating interest and amount due at maturity
• In Bills of Exchange: The value written on them that determines the payable amount

Nominal value in all these instruments serves as a legal standard for rights, basis for accounting calculations, and reference for calculating interest and returns, remaining fixed regardless of market price fluctuations.

Stock Split and Its Effect on Nominal Value

Stock split reduces nominal value by the same split ratio while increasing the number of shares.

Example: A share with nominal value 10 SAR becomes 5 SAR after a 1:2 split and the number of shares doubles.

Effects:

• Nominal value decreases
• Number of shares increases
• Total nominal value remains constant
• Shareholder rights unchanged

In Saudi Arabia: Rarely occurs since nominal value is standardized at 10 SAR, but if it happens it requires approval from the Capital Market Authority and amendment of the company's bylaws.