Mark to Market
“Mark to market” (MTM) is an accounting practice whereby the value of an asset or liability is adjusted to its current market value rather than its book value or original cost. This technique is used mainly in financial trading and is also applied for financial reporting purposes.
Marking to market allows for a more realistic and up-to-date view of an asset’s or liability’s value. It can provide an accurate picture of a company’s financial situation at a specific point in time, as it reflects the current market conditions.
For instance, if a company has a portfolio of stocks, marking to market would involve adjusting the value of this portfolio to reflect the current market prices of the individual stocks. This is in contrast to keeping the stocks valued at the original purchase prices, which may no longer be accurate or relevant.
While the mark-to-market method can provide a transparent and realistic valuation of assets, it can also lead to significant fluctuations in a company’s reported assets and income, as market prices can vary widely from day to day. During volatile market conditions, this can lead to instability in the financial statements, which is a major concern for some stakeholders.
Example of Mark to Market
Suppose an investor purchases 100 shares of a publicly-traded company, ABC Corporation, for $50 per share. The total cost (and initial balance sheet value) of this investment is $5,000 (100 shares * $50 per share).
Six months later, ABC Corporation’s share price has risen to $60. If the investor marks this investment to market, the value of the investment on the balance sheet will rise to $6,000 (100 shares * $60 per share). This accurately reflects the investment’s market value at that time.
Now let’s say that by the end of the year, ABC Corporation’s share price has dropped to $45. If the investor marks to market again, the value of the investment on the balance sheet will now be adjusted downwards to $4,500 (100 shares * $45 per share).
By marking to market, the investor accurately reflects the investment’s market value at each point in time. This practice is particularly common among mutual funds and other investment vehicles that report their net asset value (NAV) daily.