4 Things to Know About Mark to Market

Margin trading allows you to trade over and above your account balance. This allows you to trade high-value stocks worth 10-15 times the money in your account. Therefore, when you trade on margins, you take a loan to trade.

In Mark to market trading, you record the value of the security to reflect its current market value. Therefore, it is the current market worth of the underlying asset.

Here are 4 things you need to know about mark to market:

1. It is an accounting tool:

Mark to market (MTM) is an accounting tool that records the prices of assets with respect to its current market value. The value of the stocks in your demat account changes on a real-time basis. When the trading hours end, the price assigned to each stock is the one decided by trade (buying and selling). Therefore, it is the precise determination of the current value of your portfolio. 

2. A realistic estimate of the portfolio:

If you own 10 shares of XYX company purchased for Rs.40 per share. Consider that the stock is trading now at Rs.60. The mark-to-market value of the shares is equal to (10 shares x Rs.60), or Rs.600, whereas the book value might only equal Rs.400. Similarly, if the stock decreases to Rs.30, the mark-to-market value is Rs.300. You have an unrealized loss of Rs.100 on your original investment. 

3. It applies to both, stocks and bonds:

Mark to market also applies to bond markets. A bond is just like a loan, taken by the company, for day-to-day working, development, and expansion of their business. Like any loan, bonds have an interest rate. The bond issuing company has to pay interest to the lenders (bondholders). Therefore, when the interest rate goes up, the bond must be marked down. This is because the lower coupon rate will lead to a reduction in bond prices. 

4. It also applies to mutual funds:

In case of mutual funds, mark to market is done on a daily basis, during market closing. This can provide you an idea about a company’s Net Asset Value (NAV). However, this practice is easy in equity-based funds, rather than fixed income instruments.

Source: Kotak Securities