(a) Explain four functions of the stock exchange.
(b) Explain four ways by which the Central Bank regulates the activities of commercial banks.
Explanation
a. Functions of the Stock Exchange:
(i) The stock exchange makes it easy for securities to be converted into cash.
(ii) The exchange makes it possible for the transfer of securities from their original owners who may wish to sell them to others.
(iii) An investor always knows the price of his shares or holdings whether they are for sale or not as their prices are always quoted on daily basis by the Stock Exchange.
(iv) The Stock Exchange helps firms/ companies to raise capital through the sale of stocks/shares.
(v) The Stock Exchange creates confidence in the investing public by drawing up rules and guidelines which ensure fair play in share dealings.
(vi) The Exchange brings buyers and sellers of securities together.
(vii) It approves the quotation or listing of new shares thereby making them known to the public.
(b) Ways the Central Bank regulates the activities of Commercial Banks:
(i) Special deposits: Commercial banks are required to have special deposits with the Central Bank. This can be increased or decreased to influence commercial bank activities.
(ii) Bank rates: The Central Bank determines the rate at which the commercial bank should lend by fixing the minimum discount rate.
(iii) Special directives: Central Bank gives special directives to commercial banks regarding areas in the economy for which loans and advances should be given.
(iv) Moral suasion: The Central Bank sometimes engages the commercial bank in a dialogue in order to agree on how banking activities are to be carried out
(v) Cash Ratio: This is the relationship between the total deposit and cash held against it. It can be increased by the Central Bank as a control to commercial banks' activities.
(vi) Supervision: The Central Bank controls the activities of commercial banks by engaging in close supervision in ensuring that their operations are in conformity with set standards.
(vii) Open market operations: This is the strategy used by Central Bank to reduce or increase the ability of other banks to lend money to its customers by buying or selling bonds and stocks to the public as the case may be.