NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Introduction to Securities Markets

Types of Securities and Market Instruments in India

Updated 11 October 2026 · Fact-checked

Securities are tradable financial instruments. The main types in India are equity shares (ownership), debt instruments (loans to an issuer), mutual fund units (pooled investments) and derivatives (contracts whose value comes from an underlying asset). To answer exam questions, identify who the investor is to the issuer: owner, lender, pooled holder or contract party.

Understand Types of Securities and Market Instruments

A security is a tradable financial instrument that represents a claim on money or on an asset. In India, the term is defined in the Securities Contracts (Regulation) Act, 1956, and it covers shares, bonds, units of mutual funds and derivatives, among others. For the exam, you need to sort each instrument by what the holder gets and what the holder risks.

Equity shares make you a part-owner of a company. You share in profits through dividends and price gains, but dividends are not fixed or guaranteed. Shareholders are paid after all lenders if the company is wound up. Equity carries the highest risk and has the highest return potential over long periods.

Debt instruments make you a lender. The issuer promises to pay interest and return the principal on a set date. Examples are government securities, treasury bills, corporate bonds, debentures and commercial paper. Debt holders rank ahead of shareholders for repayment. Debt is usually less risky than equity, but it still carries credit risk and interest rate risk.

Money market instruments are debt instruments with a maturity of up to one year. Examples are treasury bills, commercial paper, certificates of deposit and call money. Capital market instruments have longer tenures, and include equity shares and bonds with maturity above one year.

Mutual fund units give you a share in a pooled portfolio managed by a professional. Derivatives are contracts whose value depends on an underlying asset, such as a share, index, currency or commodity. Futures and options are the main types traded on Indian exchanges. You use derivatives to hedge, speculate or arbitrage, and they do not give ownership of the underlying asset.

Key formulas to remember

Equity versus debt: relationship to issuer: Equity = owner (residual claim) | Debt = lender (fixed claim); In liquidation, lenders are paid before shareholders.
Money market versus capital market: Money market: maturity up to 1 year | Capital market: maturity above 1 year; Equity shares have no maturity and sit in the capital market.
Instrument-to-category map: T-bills, commercial paper, certificates of deposit, call money → money market | G-secs, bonds, debentures → debt (capital market) | Futures, options → derivatives; Treasury bills are issued for 91, 182 and 364 days. Government securities have longer tenures.
Derivative value: Derivative value = f(price of underlying asset); A derivative is a contract and not an ownership claim on the underlying.

How to solve Types of Securities and Market Instruments questions

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

1Read the question for the key word: owner, lender, pooled, contract, maturity or risk.
2Decide the holder's relationship to the issuer: owner (equity), lender (debt), unit holder (mutual fund) or contract party (derivative).
3If the instrument is debt, check maturity. Up to one year means money market. Above one year means a bond or government security.
4Check return type. Variable and residual means equity. Fixed or contractual means debt.
5Check risk order and claim order: equity is last in repayment, debt is ahead of equity.
6Eliminate options that use absolute words such as always or guaranteed, unless the instrument truly has that feature.
7Pick the option that matches the exact definition, not the one that merely sounds familiar.

Quickest way: Owner, lender, pool, contract

When to use it: Use this for one-line classification or 'which of the following is' questions when time is short.

Tag the instrument as owner, lender, pool or contract.
For lender instruments, apply the one-year test for money market.
Match the tag to the option and strike out any option that contradicts it.
Move on if two options remain after 30 seconds, and mark the question to return to.

Common mistakes in Types of Securities and Market Instruments

Treating dividends on equity as fixed or guaranteed.
Students confuse dividends with interest on bonds.
Fix: Interest on debt is contractual. Dividend is declared at the company's discretion and can be nil.
Classing commercial paper or certificates of deposit as capital market instruments.
They sound like corporate or bank products, so students link them to bonds.
Fix: Both are short-term debt instruments and belong to the money market.
Saying debt instruments carry no risk.
Fixed interest looks safe.
Fix: Debt has credit risk, interest rate risk and liquidity risk. Government securities have very low credit risk but still have interest rate risk.
Believing a derivative gives ownership of the underlying asset.
The name of the contract carries the stock or index name.
Fix: A derivative is only a contract. Its value comes from the underlying, and holding it gives no shareholder rights.
Mixing up who ranks first at winding up.
Both shareholders and lenders have claims on the company.
Fix: Remember the order: lenders first, then preference shareholders, then equity shareholders.

Worked examples

Example 1

Which of the following is a money market instrument? (a) Equity share (b) Debenture maturing in 5 years (c) Treasury bill (d) Equity futures

Show the solution

Money market instruments are debt instruments with maturity up to one year.
An equity share has no maturity and is an ownership instrument, so (a) is out.
A debenture maturing in 5 years is above one year, so (b) is out.
Equity futures are derivatives, so (d) is out.
A treasury bill is a short-term government debt instrument issued for 91, 182 or 364 days, so (c) fits.

Answer: (c) Treasury bill

Example 2

Which statement about equity shares and debt instruments is correct? (a) Equity holders are lenders to the company (b) Debt holders usually receive contractual interest and rank ahead of equity holders on winding up (c) Equity dividends are fixed by law (d) Debt instruments never carry any risk

Show the solution

Equity holders are owners, not lenders, so (a) is wrong.
Dividends are declared by the company and are not fixed by law, so (c) is wrong.
Debt carries credit and interest rate risk, so 'never' makes (d) wrong.
Debt holders get contractual interest and are repaid before shareholders, so (b) is correct.

Answer: (b)

Exam tips

Focus on the owner, lender, pool, contract tag. Most classification questions can be solved with it.
Watch for absolute words like always, never and guaranteed. They usually signal a wrong option.
Remember the one-year line for money market instruments, and list T-bills, commercial paper, certificates of deposit and call money.
The PMS Distributors exam is all MCQ with 10% negative marking, so guess only after you have removed at least one option.

Practice questions from Introduction to Securities Markets

Types of Securities and Market 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 Market Instruments: frequently asked questions

What are the main types of securities in India?

The main types are equity shares, debt instruments, mutual fund units and derivatives. Debt includes government securities, bonds, debentures and money market instruments. Each differs in what the holder gets and the risk taken.

What is the difference between equity and debt instruments?

Equity makes you a part-owner with a variable, residual return. Debt makes you a lender with a contractual claim to interest and principal. Lenders are paid before shareholders if the company is wound up.

What are money market instruments in India?

They are short-term debt instruments with maturity up to one year. Examples are treasury bills, commercial paper, certificates of deposit and call money. They are used for short-term funding and parking surplus cash.

Do derivatives give ownership of the underlying asset?

No. A derivative is a contract whose value depends on an underlying asset such as a share or index. It is used for hedging, speculation or arbitrage, and it does not give shareholder rights.