What Is the Difference Between Notional Value and Market Value?

When dealing with financial instruments, understanding key valuation metrics is crucial. Two important terms often used in trading are notional value and market value. While both relate to the worth of an asset or a contract, they serve different purposes and can significantly impact risk assessment, position sizing, and leverage calculations. In this article, we will break down the differences between notional value vs market value, explain their significance, and highlight how traders can use them to manage risk and optimise their strategies.

What Is Notional Value?

Notional value meaning refers to the total value of a trade based on the underlying asset. It is also known as face value or par value in stocks and bonds. It is a critical concept in leveraged instruments because it reflects the full exposure a trader has, even if only a fraction of that amount is required upfront.

It’s particularly relevant in forex, futures, and other derivatives, where traders control large positions with relatively small capital outlays. Let’s say a trader buys a standard lot of 100,000 units of the EUR/USD pair, investing only $10,000 as a margin. Although they invested only $10,000, their exposure will be $100,000. If the current exchange rate is 1.10, the notional value of this trade would be 110,000 USD (100,000×1.10). This is why traders in leveraged assets often focus on this metric when assessing risk.

What Is Market Value?

Market value is the real-time worth of a position based on the current price of the asset. It fluctuates with price changes, making it essential for tracking portfolio performance and assessing potential unrealised returns.

For example, if a trader buys 500 shares of a stock at £20 each, the market value is £10,000. If the stock price rises to £25, the position’s real-time worth increases to £12,500. Conversely, if the price drops to £18, it falls to £9,000. These changes directly impact a trader’s portfolio and, in leveraged trading, can affect margin requirements.

In practical terms, it’s what someone would receive if they closed a trade at that moment. It’s also a key metric for portfolio management, as traders rely on it to track gains, losses, and overall exposure.

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Notional Value vs Market Value

Both concepts are often confused, but they serve different purposes in trading. Understanding the distinction is crucial for assessing exposure, managing risk, and tracking portfolio performance. Here’s how they differ:

Meaning: Notional value is the full contract or position size, regardless of leverage. Market value is the real-time price of the trade based on market fluctuations.
Calculation: The notional exposure is determined by multiplying the contract size by the underlying asset’s price. Market valuations are calculated by multiplying the asset’s current price by the number of units held.
Use in Trading: Notional metrics are important for assessing exposure and margin requirements. Real-time worth is key for tracking potential unrealised returns and portfolio performance.

The Impact of Notional and Market Value on Leverage and Margin

Notional and market value plays a crucial role in how leverage and margin work in trading. Since leverage allows traders to control larger positions with a smaller capital outlay, brokers assess both figures to determine margin requirements and potential risks.

Leverage

Leverage magnifies exposure relative to the capital invested, making notional value a key factor in risk assessment. Brokers typically calculate leverage ratios based on position size rather than the funds deposited. For example, if someone has £10,000 in their account and takes a trade with a notional size of £100,000, they are using 10:1 leverage. Even if they only risk a fraction of that amount, their exposure is still based on the full figure.

Margin Requirements

While the margin is initially based on total exposure, market value fluctuations affect ongoing margin obligations. In leveraged positions, brokers require traders to maintain a minimum margin level, known as the maintenance margin. If it drops and equity falls below this threshold, a margin call may be issued, requiring additional funds to keep the trade open.

For example, someone holding a £200,000 futures contract with a £20,000 margin may see the trade’s worth drop to £190,000. If this reduction lowers account equity below the maintenance margin level, the broker may demand more funds or liquidate the position.

Why They Matter for Traders

Together, these concepts may help traders make more informed decisions about sizing, leverage, and capital allocation.

Managing Exposure and Position Sizing

Notional value helps traders understand the true scale of their exposure. A position’s notional size determines its impact on overall portfolio risk, influencing how capital is allocated. Large total exposure relative to account size can increase overall risk, even if the margin required to open the trade is small.

Market valuations, meanwhile, help in adjusting positions. It’s typical to monitor it to determine when to scale in or out of a trade. As prices move, real-time valuations help traders decide whether to maintain, reduce, or increase their holdings.

Portfolio Valuation

Notional and portfolio values play a key role in assessing portfolio health. Market worth fluctuates, influencing notional value and portfolio performance. These fluctuations are tracked to evaluate overall gains and losses and rebalance portfolios accordingly.

How Different Asset Classes Use These Metrics

The way total position size and real-time pricing apply varies across asset classes. While some markets focus on the overall contract or lot size, others rely more on live pricing to assess worth. Here’s how different instruments incorporate these calculations:

Futures: Contract specifications determine the full trade size, while price shifts impact potential unrealised returns. Margins, set as a percentage of this total, determine capital requirements and influence risk calculations.
Forex: Standard lots (100,000 units) determine trade sizes relative to invested capital. Since currency prices fluctuate continuously, live price movements dictate performance and margin recalculations.
Equities: Stock purchases typically don’t involve leverage unless using margin accounts. The number of shares owned remains fixed, but portfolio worth changes as pricing fluctuates.
Bonds: The notional value represents the amount of money the bondholders will receive at maturity, while secondary market trading determines actual pricing.

The Bottom Line

Understanding notional value vs market value may help traders assess exposure, manage risk, and track portfolio performance. They both play a crucial role in leveraged trading, and learning their unique features is highly important. To explore this further in live markets, you may consider opening an FXOpen account and access more than 700 trading instruments with competitive spreads.

FAQ

What Is Notional Value in Trading?

The notional value meaning refers to the total size of a position based on the underlying asset, regardless of how much capital is actually invested. It reflects the full exposure a trader has in a trade. For example, if a trader has a $10,000 margin requirement in a $100,000 standard lot of a forex pair, their exposure is still $100,000.

What Is the Notional Value in Crypto*?

Notional value in cryptocurrencies* refers to the total exposure of a position. If a trader opens a 10x leveraged position with $1,000, the notional valuation is $10,000, as the trade controls more than the initial capital invested.

Does Notional Value Include Leverage?

Yes, it accounts for the full position size, not just the margin required to open it.

What Is Net Position vs Market Value

Net position refers to the overall exposure after accounting for both long and short positions. Market value, on the other hand, reflects the current worth of individual holdings. Someone with 1,000 shares long and 500 shares short has a net position of 500 shares, but each trade still has its own current valuation based on the latest price.

*Important: At FXOpen UK, Cryptocurrency trading via CFDs is only available to our Professional clients. They are not available for trading by Retail clients. To find out more information about how this may affect you, please get in touch with our team.