MTM full form in share market: The stock market is a very volatile place and it involves many individuals who invest in the market trying to benefit from its movements. With the involvement of many individuals comes the crucial task of maintaining and depicting the fair value of their investments.
Showing the fair value of an individual’s investment is very important as it helps them make appropriate decisions based on their current situation. To show an accurate deception of an individual’s investment or trades, the financial world has adopted a method called MTM which is derived from an accounting method introduced in the 1800s in the united states.
In this article, we will cover what is MTM full form in share market, its meaning, and how it is used in the share market.
What Is MTM Full Form In Share Market?
MTM is an acronym for Mark to Market. It is a method of calculating the daily changes in the market value of the security. It provides individuals a fair value for their assets in the current market.
These changes are calculated after trading hours on a daily basis based on the closing price of your security. The surplus or the loss that is calculated will be settled on the day and it will not reflect in your positions on the next trading session.
In the stock market, M2M is mainly used while trading in futures contracts. When the price of the underlying asset goes down during the day, the buyer of the futures contract pays the money to the seller. When the price of the underlying asset goes up, the seller of the contract pays money to the buyer. This settlement is done at the End of the Day.
Example Of MTM In Futures Trading
As you have seen in the above explanation, there are two parties involved in the futures contract which are the buyer and the seller.
Let us take a look at how daily settlements are made for the buyers and sellers of a futures contract.
Example 1: Let’s say you buy 1 futures contract with a lot size of 1000 units. The current price of the contract is Rs. 20 per unit. Here is how the trades are calculated if you are the buyer of the contract.
| Day | Futures Price | Change | Gain/Loss | Cumulative Gain/Loss | Daily MTM |
| 1 | Rs 20 | – | – | – | Rs 20000 |
| 2 | Rs 18 | -2 | -2000 | -2000 | Rs 18000 |
| 3 | Rs 21 | +3 | +3000 | +1000 | Rs 21000 |
| 4 | Rs 19 | -2 | -2000 | -1000 | Rs 19000 |
| 5 | Rs 23 | +4 | +4000 | +3000 | Rs 23000 |
Here, you can see that the rise in the prices of the future contract increases the balance of the buyer, and the drop in the price of the contract decreases their balance.
Example 2: Let us consider another example in the case of the seller of the futures contract with the same lot size and price. This is how the trades are calculated if you are the seller of the contract.
| Day | Futures Price | Change | Gain/Loss | Cumulative Gain/Loss | Daily MTM |
| 1 | Rs 20 | – | – | – | Rs 20000 |
| 2 | Rs 17 | 3 | +3000 | +3000 | Rs 23000 |
| 3 | Rs 19 | -2 | -2000 | +1000 | Rs 21000 |
| 4 | Rs 21 | -2 | -2000 | -1000 | Rs 19000 |
| 5 | Rs 15 | +6 | +6000 | +5000 | Rs 25000 |
The balance of the seller of the future contract increases when the price of the futures contract decreases and the balance decreases with the increase in the price of the future contract.
This process of calculating mark to market continues until the expiration of the futures contract or until the position is closed.
Advantages Of MTM In The Stock Market
- MTM helps to determine the current market value of the asset which can be different from the actual recorded book value.
- MTM helps the individuals involved in futures contracts to know the amount of profit or loss they’ve made during the day.
- MTM also minimizes the counterparty risk in future trading as the balance is settled n a daily basis.
Disadvantages Of MTM In The Stock Market
- This method requires continuous checking and monitoring by a system that can only be afforded by big institutions
- In the case of volatile market conditions, this method cannot give a proper valuation.
Also Read: CMP Full Form In Stock Market? Meaning, Full Form & More!
In Closing
In this article, we covered the MTM full form in share market. Its meaning, examples, advantages, and disadvantages.
Through this article, it is understood that the MTM methodology is one of the important mechanics in the market. It lets individuals know the fair value of their trades and helps them avoid risks. This methodology also helps in avoiding counterparty risks as the transactions will be settled on a daily basis.
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