The term mark-to-market (MTM) refers to a method that records the prices of assets with respect to its current market value.
The two terms mark-to-market and mark-to-margin are often used interchangeably in the investing spectrum.
The value of the stocks in the demat (dematerialised) account of an investor alter on a real-time basis. As the trading hours end, the price assigned to each stock is the one decided by trade, which is buying and selling. MTM is the precise determination of the current value of the investment portfolio. Thus, it ensures a realistic estimate of the financial situation.
For example, let’s say, an investor owns 20 shares of ABC company purchased for Rs 100 per share. Now, consider that the stock is trading at Rs 120 per share. The mark-to-market value of the shares is equal to (20 shares multiplied by Rs 120), or Rs 2,400, whereas the book value might only be equal to Rs 2,000. Similarly, if the stock price reduces to Rs 90, the mark-to-market value is Rs 1,800. An investor has an unrealised loss of Rs 200 on their original investment.
While it is majorly used while trading future contracts, it also applies to stocks and bond markets.
In the case of mutual funds, MTM is undertaken on a daily basis, during market closing. This can provide an investor with an idea about a particular company’s net asset value (NAV).
Experts are of the opinion that MTM highlights the true value of an asset as it is confirmed with respect to the current market price.
However, the term MTM is likely to be problematic at times as the value of assets may vary every second due to changing market scenarios. Also, problems may occur in MTM when market-based measurements do not offer the true value of an underlying asset.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.