In the fast-paced world of stock trading, keeping track of your investments is crucial. The financial landscape can shift quickly, and understanding how your assets are performing in real time can make a big difference. This blog explores a key concept used to assess the value of your investments accurately. Whether you’re a seasoned trader or just starting, knowing how to monitor and adjust your investment values can greatly impact your financial strategy.
What is Mark-to-Market (MTM)?
Mark-to-Market (MTM) is a financial method used to adjust the value of stocks, bonds, or other assets so they reflect the current price in the market. Unlike the original purchase price, which stays the same, MTM changes the value based on how much the asset would sell for today.
For example, if you bought a stock for ₹500 but its current price is ₹600, the MTM value would be ₹600, not ₹500. This helps investors see the actual worth of their investments as market prices rise or fall.
The main goal of MTM is to provide a clear, up-to-date picture of how well or poorly an investment is performing. It shows profits or losses without needing to sell the asset, allowing traders and investors to track their gains or losses day by day.
MTM is especially helpful in fast-moving markets, like the stock market, where prices change frequently.
By using MTM, investors can make smarter decisions about when to buy, hold, or sell their assets. It also helps companies and financial institutions keep their accounts accurate by reflecting the real-time value of their holdings.
How Does MTM Work in Stock Market?
Mark-to-Market (MTM) in the stock market is all about keeping track of the current value of stocks or other investments. This is done by adjusting the value of the asset to match its latest market price.
MTM is important because stock prices can change daily or even minute by minute, and this method helps reflect those changes accurately.
To calculate MTM, the closing price of the asset for the day is considered. If the price has gone up compared to the previous day, the value of the investment increases, showing an unrealised profit.
On the other hand, if the price has dropped, the value goes down, reflecting an unrealised loss. These changes are recorded without selling the asset, meaning you haven’t made or lost real money yet, but it shows what could happen if you decide to sell.
For traders, MTM helps keep track of gains and losses throughout the trading day. Brokers and stock exchanges use MTM to make sure that investors have enough funds to cover their losses, especially in trades like futures and options.
If an investor’s loss grows too large, they may be asked to add more money to their account, which is called a margin call.
MTM is usually calculated at the end of each trading day. This keeps both the trader and the financial system aware of the current situation, reducing risk and making the market more transparent.
Also Read: What is Volatility in the Stock Market?
MTM Example
Let’s say you bought ten shares of a company at ₹100 each. So, your total investment is ₹1,000 (10 shares x ₹100).
Over the next few days, the price of the stock changes based on market movements. Here’s how Mark-to-Market (MTM) would work:
- Day 1: The stock price rises to ₹110 per share. Your total investment is now worth ₹1,100 (10 shares x ₹110). According to MTM, you have an unrealised profit of ₹100 since you haven’t sold the shares yet.
- Day 2: The stock price drops to ₹95 per share. Your investment is now worth ₹950 (10 shares x ₹95). Based on MTM, you now have an unrealised loss of ₹50.
- Day 3: The stock price climbs again to ₹105 per share. Your total value is ₹1,050 (10 shares x ₹105). Now, you have an unrealised profit of ₹50.
Throughout these days, MTM keeps adjusting the value of your shares to reflect the current price without you actually selling them. It helps you understand where your investment stands in real time, showing your potential profits or losses based on market conditions.
Advantages and Disadvantages of MTM
| Advantages | Disadvantages |
| Gives an updated value of your investment, helping you see real-time profits or losses. | Market fluctuations can cause frequent changes, leading to emotional stress for investors. |
| Helps traders and investors make quick decisions based on current market conditions | Unrealised losses might trigger margin calls, forcing traders to add more funds to their accounts. |
| Reflects the actual market situation, ensuring transparent and accurate financial records | Not suitable for long-term investors, as daily price changes may not matter for long-term goals. |
Conclusion
Understanding Mark-to-Market (MTM) is important for anyone involved in stock trading. It helps traders and investors see the real-time value of their assets, giving them a clear picture of potential profits or losses. By adjusting the value based on the latest market prices, MTM ensures that financial records are accurate and up to date. This allows traders to manage their risks better and make informed decisions. Whether prices are rising or falling, MTM helps you stay aware of your current financial position, making it a valuable tool in fast-moving markets.
FAQs
Ans: MTM is calculated by updating the value of an asset based on its current market price. For example, if a stock’s price goes up or down, its value is adjusted to reflect this change.
Ans: In futures trading, MTM affects the account balance daily. If the market moves against a trader’s position, it may lead to margin calls, requiring additional funds to cover potential losses.
Ans: MTM itself is neither a profit nor a loss; it shows the current value of an investment. It reflects unrealised gains or losses based on the latest market price.
Ans: Yes, MTM can affect your portfolio’s value by updating the worth of your investments according to current market prices, showing how much your assets are worth at any given moment.
Ans: MTM shows the current value of an investment, reflecting unrealised gains or losses. Realised profits are actual gains or losses that occur when an asset is sold.
Ans: MTM is typically updated daily at the end of each trading day. This ensures that the value of your investments reflects the most recent market conditions.
Ans: Yes, MTM can cause large fluctuations in your account balance, especially if the market price of your assets changes significantly. This is because MTM adjusts the value based on the latest market prices.
