Start with the mechanism, because the distinction only makes sense once you see how the two figures are built.
Nominal return is simple arithmetic: what you have now, divided by what you started with, minus one. If you put in ₦1,000,000 and it grows to ₦1,200,000 over a year, your nominal return is 20%. It is accurate as far as it goes.
Real return asks a different question: did that ₦1,200,000 buy more, the same, or less than your original ₦1,000,000 would have bought a year earlier? To answer that you need the inflation rate over the same period, and you combine the two using (1 + nominal return) divided by (1 + inflation rate), minus one.
Take a worked example, with figures built for illustration and not pulled from any current inflation report. Chidi invests ₦1,000,000 in a basket of Nigerian equities. A year later the portfolio is worth ₦1,200,000, a 20% nominal gain that would look good on any statement. Suppose inflation over that same year runs at 28%. The real return is (1.20 / 1.28) minus one, which comes to roughly minus 6.25%. Chidi's money grew in naira terms and shrank in purchasing-power terms at the same time. He has more currency and less of what that currency can buy.
Extend the example over three years and the gap does not stay the same size, it widens, because both returns compound. Say Chidi's portfolio keeps compounding at 20% a year and inflation holds at 28% a year for three years running (again, illustrative figures, not a forecast). His nominal balance after three years is ₦1,000,000 x 1.20³, which is ₦1,728,000. A tidy 72.8% nominal gain over three years. But divide that growth factor by the inflation growth factor, 1.28³, which is 2.097, and the real value of his holding comes out at roughly ₦824,000 in year-one purchasing power. He is nominally richer by ₦728,000 and really poorer by about ₦176,000. The nominal statement and the real position are pointing in opposite directions, and only one of them reflects what he can actually buy with the money.
This is where a high-inflation setting changes the stakes. When inflation is low, say 2% a year, the formula barely moves the figure: a 20% nominal gain becomes a real gain of about 17.6%. When inflation runs into double digits, as in the 28% example above, the gap between the two figures can be the difference between a genuine gain and a genuine loss dressed up as a gain. A portfolio that merely matches inflation is standing still in real terms, not growing. One that beats a low nominal hurdle but loses to a high inflation rate is going backwards, however the statement reads.
What a nominal return leaves out is the adjustment itself. A percentage change in the local currency, over a stated period, is not wrong. But on its own it is incomplete, because it does not tell you what the inflation rate was over that same window or do the division for you. That calculation sits with the reader. If a source does not state the inflation period it used, or does not state one at all, treat the nominal figure as exactly that: nominal, and no more.
The practical habit worth building is pairing the two numbers whenever you look at a return, your own or anyone else's. Ask what period the return covers, and what inflation did over that identical period, not a different one. A 20% nominal gain over a year when inflation ran at 10% is a real gain of roughly 9%. The same 20% nominal gain against 28% inflation is a real loss. The nominal figure never changes between those two cases. The real one is what actually moved, and it is the one that tells you whether your money did its job.
Stockology tracks the Nigerian and wider African markets in one place. Join the waitlist for updates as new features ship.