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FRM-1 Study Notes

Comparison of Futures with Equity Securities

  • Futures
    • Purpose – to facilitate risk shifting and price discovery
    • For every long position, there is a short position (short positions are common)
    • Life is limited (duration of futures contract)
    • Margin put up is earnest money
    • Price and position limits exist
    • No limits on outstanding future contracts (open interest)
    • Trading is regulated by Commodity Futures Trading Commission, futures exchanges and National Futures Association
  • Stocks
    • Purpose – to assist in capital formation
    • Shorting is not a common phenomenon (many have conditions like previous ‘up tike’ is required, inventory is required to borrow & short sell)
    • Stocks generally have perpetual life
    • Margin is a form of down payment
    • Generally don’t have price and position limits
    • Outstanding supply of shares if fixed at any point in time
    • Trading is regulated by Securities and Exchange Commission, stock exchanges, state regulatory agencies and FINRA

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