NISM-Series-XV: Research Analyst · Introduction to Securities Market

Types of Securities and Financial Instruments in India

Updated 11 October 2026 · Fact-checked

Securities are tradable financial instruments that represent ownership, a loan or a contract value. The main types are equity shares (ownership), debt instruments such as debentures and bonds (loans), derivatives (contracts whose value comes from an underlying asset) and mutual fund units (pooled investments). To solve questions, identify who gets what claim.

Understand Types of Securities and Financial Instruments

A security is a financial instrument that can be issued and traded in the market. It gives its holder a claim: ownership in a company, a right to be repaid a loan, or a right under a contract. Under the Securities Contracts (Regulation) Act, shares, bonds, derivatives and mutual fund units are all included in the definition of securities.

Start with the simplest split. Equity shares mean ownership. The holder is a part-owner, has voting rights, gets dividends only if the company declares them, and is paid last if the company is wound up. Debt instruments mean lending. The holder is a creditor, usually gets fixed interest and the principal back on maturity, and ranks ahead of shareholders on liquidation.

Between the two sit hybrids. Preference shares are part of share capital, but they get a fixed dividend rate and are paid before equity shareholders in dividends and on winding up. They normally have no voting rights on ordinary matters. Debentures are debt instruments issued by companies. They may be secured (backed by assets) or unsecured, and convertible or non-convertible. A convertible debenture can turn into equity shares on stated terms.

Derivatives are contracts whose value depends on an underlying such as a share, index, currency or commodity. Futures and options are the common forms. You do not own the underlying by holding the contract. Mutual funds pool money from many investors and invest it in a portfolio. Investors hold units, and the value of each unit is the net asset value (NAV).

Other products include government securities (G-Secs), treasury bills, commercial paper, certificates of deposit and exchange traded funds. Money market instruments have a maturity up to one year. The exam tests whether you can match a feature, such as fixed return, ownership or leverage, to the right instrument.

Key formulas to remember

Equity vs debt claim: Equity = ownership (residual claim); Debt = loan (fixed claim); On winding up, creditors are paid before preference shareholders, who are paid before equity shareholders.
Order of payment on liquidation: Secured creditors → unsecured creditors → preference shareholders → equity shareholders; Use this as a ranking of risk. Equity is the riskiest and has the highest potential return.
Mutual fund NAV per unit: NAV = (Market value of assets − Liabilities) ÷ Number of units outstanding; Units are priced at NAV, not at a market price like a share, for open-ended schemes.
Money market maturity: Money market instruments: maturity up to 1 year; Treasury bills, commercial paper and certificates of deposit are money market instruments.
Derivative value: Value of derivative depends on the underlying asset; Futures create an obligation. Options give the buyer a right, not an obligation.

How to solve Types of Securities and Financial Instruments questions

Use this method for any question that asks you to identify, compare or classify a security.

1Read the question and mark the key feature given, such as ownership, fixed interest, maturity, or underlying asset.
2Decide the broad class: equity, debt, hybrid, derivative or pooled fund.
3If the feature is about voting rights or residual claim, think equity. If it is about fixed returns and repayment, think debt.
4For preference shares, check whether the option mentions fixed dividend and priority over equity. That points to a hybrid.
5For derivatives, check for words like underlying, contract, expiry, margin or premium.
6For mutual funds, look for pooled money, units and NAV.
7Eliminate options that mix features from two classes, such as an equity share with a fixed maturity date.
8Pick the option that matches every part of the statement, not just the first part.

Quickest way: Feature-to-instrument matching

When to use it: Use it for one-line MCQs asking which instrument has a given feature.

Ownership or voting: equity share.
Fixed interest and maturity: debenture or bond.
Fixed dividend and priority over equity: preference share.
Value from underlying asset: derivative.
Units and NAV: mutual fund.
Maturity up to one year: money market instrument.

Common mistakes in Types of Securities and Financial Instruments

Treating preference shares as debt
They pay a fixed rate, which looks like interest.
Fix: Remember they are share capital. The dividend is paid from profits and is not a legal obligation like interest.
Thinking debenture holders are owners
Debentures are issued by companies, so students link them to ownership.
Fix: Debenture holders are creditors. They get interest and have no ownership or ordinary voting rights.
Believing the holder of a derivative owns the underlying
The contract is named after a share or index.
Fix: A derivative is only a contract on the underlying. Ownership does not pass unless delivery is settled.
Ranking equity above preference on liquidation
Equity is seen as the main class of capital.
Fix: Preference shareholders are paid before equity shareholders. Equity is the residual claimant.
Confusing mutual fund units with shares of a company
Both are bought and held in demat form.
Fix: A unit is a share in a pool of investments, valued at NAV. A share is ownership in one company.
Calling every short-term instrument a treasury bill
Money market names look alike.
Fix: Treasury bills are issued by the government. Commercial paper is issued by companies, and certificates of deposit by banks.

Worked examples

Example 1

A company has issued securities that pay a fixed rate of dividend, rank ahead of equity shares for dividend and for repayment on winding up, and normally carry no ordinary voting rights. Which security is this?
A. Equity share
B. Preference share
C. Debenture
D. Futures contract

Show the solution

Fixed dividend rate is not a feature of equity shares, so rule out A.
The word dividend shows it is share capital, not interest on a loan, so rule out C.
A futures contract has no dividend or voting feature, so rule out D.
Priority over equity and no ordinary voting match preference shares.

Answer: B. Preference share

Example 2

Which statement about debentures and equity shares is correct?
A. Debenture holders are owners and equity holders are lenders
B. Debenture holders are creditors and equity holders are owners with a residual claim
C. Both get a fixed return and repayment of capital
D. Equity holders are paid before debenture holders on winding up

Show the solution

A reverses the roles, so it is wrong.
C is wrong because equity has no fixed return or promised repayment.
D is wrong because creditors are paid before shareholders on winding up.
B states the roles correctly: debenture holders lend, equity holders own and take what remains.

Answer: B. Debenture holders are creditors and equity holders are owners with a residual claim

Exam tips

Expect definition-style and feature-matching MCQs. Learn one key feature for each instrument.
Watch for options that mix features, such as equity with a fixed maturity.
Know the order of claims on liquidation. It is a frequent trap.
Remember that a derivative derives value from an underlying and is not ownership of it.
With negative marking of 25% of the question's marks, skip a question only if you cannot eliminate at least two options.

Practice questions from Introduction to Securities Market

Types of Securities and Financial Instruments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Types of Securities and Financial Instruments: frequently asked questions

What are the main types of securities in the Indian market?

The main types are equity shares, preference shares, debentures and bonds, government securities, derivatives and mutual fund units. Money market instruments such as treasury bills and commercial paper are also traded.

What is the difference between equity, debt and derivatives?

Equity gives ownership and a residual claim. Debt is a loan with a claim to interest and principal. A derivative is a contract whose value depends on an underlying asset and does not itself represent ownership or a loan.

What are preference shares and debentures?

Preference shares are share capital that gets a fixed dividend and priority over equity shares in dividends and on winding up. Debentures are debt instruments issued by a company, paying interest and repaying principal on maturity.

Is a mutual fund a security?

Yes. Mutual fund units are securities. Investors pool money, and the fund invests it in a portfolio. Units are valued using NAV.