Introduction
What does nominal mean?
Nominal is a common, multi-context financial term. It means very little or far below the actual value or expense in the first place. This adjective changes words like a fee or charge in finance.
A nominal fee is lower than the actual price of the service provided or probably easy to afford for a consumer or a fee that is small enough to have no significant impact on one's financial situation.
Nominal can also refer to an unadjusted rate or value change under finance and economics. Nominal refers to a figure that is unadjusted for seasonality, inflation, interest compounding, and other modifiers when determining items such as the gross domestic product (GDP) or interest rates. Nominal in this usage demonstrates the contrast to ""real"" economic statistics that bring modifications or improvements to results.
What is the difference between nominal and real?
The word real, as opposed to nominal, describes the importance of something in producing a more accurate measure after making adjustments for different factors. The distinction between nominal and real GDP, for example, is that nominal GDP calculates a country's economic production using spot market prices, and real GDP takes into account inflation to produce a much more accurate measure.
Real vs nominal rate of return
The amount that an investor earns from an investment is known as Rate of Return (RoR). While the nominal return rate shows the earnings of the investor as a percentage of the initial investment, inflation is taken into account by the real rate of return. As a result, the real rate gives a more correct assessment of the investor's earnings' actual buying power.
Consider, for instance, you have purchased a Rs 10,000 stock and sold it for Rs 11,000 in the following year. Nominal return rate is 10% on such stock. To get a more accurate picture of your actual return, however, this rate needs to be adjusted for inflation, as your money's purchasing power has probably changed over a year. Therefore, if inflation is 4 percent for that year, the actual return rate is only 6 percent or the nominal return rate minus the inflation rate.
