Investment word of the day: Mark to market — what it means and why it is relevant

Investment word of the day: Mark to market is a financial metric that calculates the true value of a company's assets and liabilities, which fluctuates over time. One of the major objectives of mark to market is to measure and evaluate the financial condition of a company based on existing market factors.

This approach gives the latest update of the financial worth of an asset, similar to checking the value of an investment portfolio at any point in time. Typically, mutual funds and stocks are marked to market daily. It is also used for futures trading.

Relevance of mark to market

• Reflects financial performance: The mark to market is an approach to determine the financial position of a company over a period of time. It helps investors assess the performance of a company by analysing the original cost of the investment with the current market value.

• Current valuation: Mark to market gives the real-time valuation of a company's assets and liabilities. It helps investors evaluate the updated value of assets and liabilities.
• Evaluate risks: Mark to market helps analyse potential risks by highlighting the actual market value of a company's assets and liabilities. Investors can use this information to effectively manage their portfolio and implement various strategies.

Risks of mark to market

One of the major risks associated with mark to market is the volatility of the market. The consistent rise and fall in the market often make it difficult to determine the true value of an asset, posing an issue in estimating the change in its future value.

This metric also makes it challenging to buy or sell an asset during unusual market conditions, such as a pandemic or a financial crisis, as mark to market does not reflect the actual value.

Disclaimer: This article is for informational purposes only and does not constitute financial advice; please consult a qualified financial advisor before making any financial decisions.