(a) State four functions of a Stock Exchange. (b) Explain the following types of securities traded on the Stock Exchange: i. debentures ii. bonds iii. share...

Answer Details

(a) Four functions of a Stock Exchange

1. It provides a ready and organised market where existing (second-hand) shares, stocks and bonds can be bought and sold.
2. It helps governments and companies to raise long-term capital by providing a market for new securities.
3. It provides a means of valuing securities, since the daily quoted prices show the current worth of shares.
4. It protects investors by regulating dealings and ensuring that only genuine, approved companies are listed, and it provides an avenue for safe investment of savings.

(b) Types of securities traded

• i. Debentures: these are acknowledgements of a loan to a company. A debenture holder is a creditor, not an owner, who is paid a fixed rate of interest whether or not the company makes a profit, and is repaid on maturity.
• ii. Bonds: these are long-term loan instruments issued by governments or large corporations to borrow money from the public. The holder is a creditor who receives fixed interest and is repaid the principal at maturity.
• iii. Shares: these are units into which the capital of a company is divided. A shareholder is a part-owner of the company and is entitled to a share of profits called dividend, which varies with the company's performance.
• iv. Stock: this is the consolidated bundle of a member's fully paid-up shares merged into one lump that can be transferred and sold in any fractional amount, rather than in whole units like shares.