Mark-to-Market (MTM)
What it is:
Mark-to-market (MTM) is an accounting method that records the value of an asset according to its current market price.
How it works (Example):
For example, the stocks you hold in your brokerage account are marked-to-market every day. At the closing bell, the price assigned to each of your stocks is the price that the larger market of buyers and sellers decided it would be at the end of the day. No other pricing information is included.
MTM is similarly used to price futures contracts, which is very important for investors who trade commodities with margin accounts.
Why it Matters:
Most agree that MTM pricing accurately reflects the true value of an asset. However, MTM can be problematic in times of uncertainty because the value of assets can vary wildly from second to second -- not because of changes in the underlying value of assets, but because buyers and sellers are surging in and out in unpredictable ways. It is important not to confuse mark-to-market with mark-to-management or mark-to-model.
