Many individuals might have seen the marketing conducted by financial service providers, which is where they likely came across the various products these financial service providers offer as being available for nominal fees. To condense this term, a nominal fee can be classified as a purchase or payment price, as with any other ordinary fee. However, in the context of the word 'nominal,' it implies that the fee is smaller in comparison to its true value.
What Does Nominal Mean?
A nominal fee is seen as any type of small charge or fee. There isn't any fixed definition that's used to classify how much a nominal fee needs to be fit under this category. In addition to this, no charge is the same, as it can be a percentage or flat rate. Due to this, a nominal fee is known to cover a wide array of actual fees. From the characteristics of a nominal fee, knowing how a particular charge is calculated is incredibly vital to understand before agreeing to pay this cost.
Examples of a Nominal Fee
Most services available for nominal fees are existing add-ons to products that have previously been purchased. An example of this would be signing up for a credit card with a bank and paying an annual fee for these services. From here, this banking institution might offer you enhanced account access or security protection services, which are available for an additional fee to what an individual already paying the bank. Another common example of nominal costs is when an individual pays for faster processing of a document or insurances.
Are There Other Uses for Nominal Costs?
The nominal fee term exists outside of the context often used by financial service providers. Nonetheless, this term maintains a similar meaning. One example where this is prevalent is in a company where wealthy executives collect small salaries. A CEO who is entitled to $1 a year (along with any bonuses and stock options) might be categorized as receiving a nominal fee for his work in the business. This is also the same where a court settlement might use the concept of a nominal fee to assign any wrongdoing that has been conducted by one party. This is done without adding the penalty of severe financial consequences this party is liable for after partaking in the related wrongdoing.
In the case of interest rates, many people ask how these rates are different from real interest rates. A real interest rate has been altered in a way that removes the effects of inflation and reflects the real cost associated with the borrower, along with the real yield reaped by the investor or lender. On the other hand, nominal interest rates refer to the interest rate before considering the inflation associated with this account.
Nominal vs. Real
When looking at the term real, as opposed to nominal, it's used to express the value of something after making the necessary adjustments that consider several factors. As a result, a more accurate measurement is provided. This can be implemented when looking at the real rate of return for an investment. This rate of return is calculated as the amount an investor receives on a specific investment. On the other hand, the nominal rate of return is equipped to reflect the earnings of an investor, which is based on the initial investment. The real rate of return considers the inflation this investor has experienced from initially investing this money to the return that's been earned and the marketing conditions that have led to such inflation occurring. As a result of this calculation, the real rate provides investors with a more accurate analysis of the actual buying power of the earnings this investor can expect.
Avoiding Confusion about Nominal Fee
It's important to understand that many common financial terms use the word 'nominal' without meaning nominal fees. When looking at a case involving compound interest, the nominal interest included in this interest refers to the amount of interest a depositor or investor would earn if this interest wasn't compounded. Another instance where this applies is involving the nominal price of a loan. This is the primary difference between the principal amount (being borrowed) and the total amount of money (being paid towards this loan). The difference between these two amounts is expressed as a percentage. In both of these cases, nominal loans and interest don't mean the same thing as a nominal fee.
For more information regarding nominal fees or other personal finance terms like an in-kind transfer or the rule of 70, contact a personal financial advisor.
Frequently Asked Questions
What is Nominal Quantity?
A simple way to understand nominal quantity is by comparing it to the quantity of money. When talking about nominal quantity, this is the quantitative amount of money that's expressed in whatever units are used.
What is GDP Nominal?
Nominal GDP is used to measure a nation's gross domestic product (or GDP) by using current prices. During this process, no adjusting is done for inflation. On the other hand, real GDP measures a nation's economic output after this measurement has been adjusted for the impact of inflation.
What is Non-Nominal?
Non-nominal is classified as being the opposite of nominal. If something is non-nominal, it's also said not to be nominal. Unlike this data, which is a group of variables that are non-parametric, ordinal (or non-nominal) data is categorized as ordered variables that are non-parametric. Even though both of these data types are non-parametric, a significant difference is that ordinal data is organized in a specific order.
What is a Nominal Position?
When nominally speaking about a position, you can use this term to indicate that something or someone is deemed to have a specific status or identity. However, in reality, this person or situation doesn't have the status or identity one once thought they had. However, as we have mentioned before, there isn't only one definition that fits with this term. That's why it could also be described as the nominal fee or price. This is because it's very small when compared to the real cost or value of an item that's being sold or bought.
Disclosures:
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, LTD., a registered investment advisor. Stratos Wealth Partners, LTD. The Kelley Financial Group, LLC are separate entities from LPL Financial.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The content is developed from sources believed to be providing accurate information.
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