Mark-to-market (MTM)
Full form: Mark-to-Market
MTM stands for mark-to-market. It means valuing a position at today's market price instead of the price you paid. In Indian futures trading, the gain or loss is worked out every day and credited or debited to your account, even though you have not closed the position.
Why daily settlement exists
A futures contract can stay open for weeks. If gains and losses were counted only at the end, one side could build up a large loss and then fail to pay. Settling the change in value every day keeps the amounts small and the market safe. The exchange's clearing corporation handles this daily settlement.
How MTM works in futures
At the end of each trading day the exchange compares that day's settlement price with the previous day's. If the price moved in your favour, the difference is added to your account. If it moved against you, the difference is deducted. If your balance falls below the margin you are required to keep, your broker may ask you to add money.
MTM elsewhere in investing
The same idea appears in other places. A mutual fund's NAV is based on the market value of everything it holds, updated each day. The 'unrealised profit' on your trading screen is your position marked at the latest price.
A two-day example (hypothetical numbers)
You buy one lot of 500 shares of a company's futures at ₹1,000. At the end of day 1 the settlement price is ₹1,010. The MTM gain is ₹10 × 500 = ₹5,000, credited that evening.
On day 2 the settlement price is ₹995, which is ₹15 lower than day 1. The MTM loss is ₹15 × 500 = ₹7,500, debited that evening. After two days you are ₹2,500 below your entry price, and every rupee of that has already moved in or out of your account.
Common questions
- What is the full form of MTM?
- Mark-to-market.
- Is MTM a profit or a loss?
- It can be either. MTM is the daily change in the value of an open position, and it can be a gain or a loss.
- Why was MTM debited when I have not sold anything?
- Because open futures positions are settled every day. A falling price shows up as a debit even before you close the trade.
- Does MTM apply to options?
- A buyer of an option pays the premium up front and does not pay daily MTM on it. Sellers of options must keep margin, and that margin can change as prices move.