Theory question 105
Stock ExchangeCommerce 2 (theory)
(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) shares;
(iv) stock.
Show the model answer
(a) Any four: provides a market for buying and selling existing securities; helps companies and government raise long-term capital; gives information on share prices; protects investors through its rules; encourages saving and investment; serves as a barometer of the economy; helps value companies; encourages foreign investment.
(b)(i) Debentures – long-term loans to a company, usually secured on its assets, earning a fixed rate of interest; holders are creditors.
(ii) Bonds – long-term loan certificates issued by government or companies that pay fixed interest and are repaid on a set date.
(iii) Shares – units of a company's capital; holders are part-owners and receive dividends (ordinary or preference).
(iv) Stock – fully paid-up shares converted into a block that can be bought and sold in any amount; also government securities.
Show the owner/creditor difference: shareholders own, debenture and bond holders lend.