Mark to market accounting in investment accounts
Market to market accounting shows up in investment accounts in two ways.
The first way affects many retail investors. If you invest in a mutual fund, the assets held by that mutual fund are marked to market at the end of every trading day. This is known as the mutual fund’s net asset value, and it’s the price you’ll pay for shares or receive when redeeming shares. Note that mutual funds’ prices do not fluctuate during the trading day, and purchases and redemptions happen only at the end of the day after the funds assets are marked to market.
The second occurrence is in futures trading. When you open a futures position, you’re not actually buying anything. You’re simply entering into an agreement to buy or sell a commodity at some point in the future. In order to ensure you can settle that contract, your broker will require you to hold a certain amount of cash, typically a relatively small percentage of the contract’s value.
At the end of every day, the broker will mark to market the value of the futures contract. If the total value of the contract increased, it’ll add cash to your account. If it decreased, it’ll deduct cash from your balance. If the value of the futures contract declines too much, you may fall below the margin requirements set by your broker, which will force you to liquidate your position or add cash to your account.
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