Equity Shares, Preference Shares and Debentures (ICSE Class 10)
Updated 17 October 2026 · Fact-checked
Shares are the units of a company's owned capital: equity shareholders are the owners with voting rights and an uncertain dividend; preference shareholders get a fixed dividend and repayment of capital before equity. A debenture is a written acknowledgement of a loan carrying fixed interest, and debenture holders are creditors, not owners. Shares are owned capital, debentures are borrowed capital.
Equity and preference shares are owned capital with dividends (uncertain or fixed); debentures are borrowed capital, so holders are creditors earning fixed inte
Illustration drawn for QuestionBuddy.
Understand Equity Shares, Preference Shares and Debentures
1. Shares
The capital of a company is divided into small units of equal value, each called a share. A person who buys shares is a shareholder and part-owner of the company. Share capital is owned capital, not repaid during the life of the company.
2. Equity (ordinary) shares
- Carry no preferential rights; equity shareholders are the real owners.
- Voting rights: they elect the directors.
- Dividend is not fixed; it depends on profit and is paid after the preference dividend.
- On winding up, capital is repaid last, after creditors and preference shareholders.
- Maximum risk, but the highest gain when profits are high.
- Permanent capital; low face value allows small investors to buy.
3. Preference shares
Carry two preferential rights over equity shares: (i) dividend at a fixed rate before any dividend to equity shareholders, and (ii) repayment of capital before equity shareholders on winding up.
- Usually no voting rights (except on matters affecting their rights or when dividend is unpaid).
- Lower risk and lower return than equity.
- A mixture of equity and debenture features: part of share capital and paid from profits, but with a fixed rate and priority.
- Types include cumulative, non-cumulative, redeemable and convertible.
4. Debentures
A debenture is a written document of the company acknowledging a debt and promising to pay a fixed rate of interest and to repay the principal on a fixed date. Debenture holders are creditors. Debentures are borrowed capital, usually secured on assets, with no voting rights, and interest must be paid whether or not there is a profit.
5. Shares versus debentures
| Basis | Shares | Debentures |
|---|---|---|
| Status | Owners | Creditors |
| Return | Dividend, depends on profit | Fixed interest, payable even in a loss |
| Capital | Owned | Borrowed |
| Voting | Equity shareholders vote | No voting |
| Repayment | Not repaid in life of company | Repaid after a fixed period |
| Security | Unsecured | Usually secured on assets |
| Winding up | Paid last | Paid before shareholders |
| Risk | Higher | Lower |
6. Capital market
The capital market is the market for long-term funds, with a primary market for new issues and a secondary market (stock exchange) for trading existing securities; SEBI regulates it. Its functions include mobilising savings, giving liquidity and channelling funds into industry.
7. Short-term bank loans (meaning only)
Cash credit: a limit sanctioned against current assets, interest only on the amount used. Overdraft: allowing a current account holder to draw more than the balance up to a limit. Discounting of bills: the bank pays the bill amount, less a charge, before the due date.
8. Choosing
A company that wants no extra owners and has steady earnings may choose debentures. A company that wants to avoid fixed payments in a poor year prefers equity.
Equity Shares, Preference Shares and Debentures: key facts
- Equity shares
- Owners
- Voting rights
- Dividend varies
- Paid last on winding up
- Maximum risk
- Owned capital.
- Preference shares
- Fixed dividend first
- Capital repaid before equity
- Usually no vote
- Owned capital with priority.
- Debentures
- Creditors
- Fixed interest
- Borrowed capital
- No vote
- Repaid on fixed date
- Interest even in loss.
How to answer Equity Shares, Preference Shares and Debentures questions
Expect meaning of each, the preference share features, shares versus debentures and a simple comparison of returns.
- 1Decide whether the holder is an owner (shares) or a lender (debentures).
- 2For return, state dividend or interest and when it is paid.
- 3In a calculation, find preference dividend first, then the balance for equity.
- 4In a distinction compare at least four bases for both sides.
Equity Shares, Preference Shares and Debentures in real life
The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.
Preference dividend
Suppose a company has 10,000 preference shares of ₹100 each carrying a fixed dividend of 8 per cent a year.
How much preference dividend is payable in a year?
Try it first, then show the solutionSolution
- Preference share capital = 10,000 x 100 = ₹10,00,000.
- Dividend = 8% of 10,00,000 = ₹80,000.
Answer: ₹80,000.
Memory hook: Fixed rate on face value.
Interest on debentures
Imagine a company that issues debentures worth ₹5,00,000 at 10 per cent interest and then makes a loss in the year.
Must it pay interest?
Try it first, then show the solutionSolution
- Debenture holders are creditors.
- Interest is payable whether or not the company earns a profit.
Answer: Yes, ₹50,000 interest is payable even in a loss.
Memory hook: Creditors are paid, profit or not.
Tricks to remember Equity Shares, Preference Shares and Debentures
Short memory aids. Say each one aloud once, then use it on a question the same day.
Paid first twice
Preference shares get Profits (dividend) first and Principal (capital) first.
Use it when: Preference rights.
Owner or lender
Shares make you an owner; a debenture makes you a lender.
Use it when: Status.
Equity Shares, Preference Shares and Debentures: solved examples
Ordered from board level to HOTS. Try each one before you open the solution.
Example 1: Identify · 1 mark · MCQBoard level
Debenture holders are the company's:
(a) owners
(b) creditors
(c) directors
(d) employees
Try it first, then show the solutionSolution
- Debenture holders lend money to the company, so they are creditors.
Answer: (b)
Example 2: Meaning · 2 marks · Very short answerBoard level
What are preference shares? State their two preferential rights.
Try it first, then show the solutionSolution
- Shares that carry preference over equity shares.
- Right to a fixed dividend before equity shareholders, and repayment of capital before equity shareholders on winding up.
Answer: Shares with a prior right to a fixed dividend and to repayment of capital.
Example 3: Dividend calculation · 4 marks · Short answerHarder board level
Suppose a company has 4,000 preference shares of ₹100 each with a dividend of 9 per cent, and 20,000 equity shares of ₹10 each. The profit available for dividend is ₹1,56,000. Find the preference dividend and the balance for equity shareholders, and the rate of dividend on equity.
Try it first, then show the solutionSolution
- Preference capital = 4,000 x 100 = ₹4,00,000.
- Preference dividend = 9% of 4,00,000 = ₹36,000.
- Balance for equity = 1,56,000 - 36,000 = ₹1,20,000.
- Equity capital = 20,000 x 10 = ₹2,00,000; rate = 1,20,000 / 2,00,000 x 100 = 60 per cent of face value, i.e. ₹6 per share.
Answer: Preference dividend ₹36,000; ₹1,20,000 for equity, which is ₹6 per share (60 per cent).
Example 4: Shares versus debentures · 4 marks · Short answerHarder board level
Distinguish between shares and debentures on four bases.
Try it first, then show the solutionSolution
- Status: shareholders are owners; debenture holders are creditors.
- Return: dividend depends on profit; interest on debentures is fixed and payable even in a loss.
- Voting: equity shareholders vote; debenture holders do not.
- Repayment: share capital is not repaid in the life of the company; debentures are repaid on a fixed date.
Answer: Shares are owned capital with variable dividend and votes; debentures are borrowed capital with fixed interest and no votes.
Example 5: Choosing finance · 8 marks · Case-basedHOTS / competency
Suppose a company needs ₹20,00,000 for a new plant. Its profits are uncertain, existing owners do not wish to share control, and it has plenty of assets. Compare raising the money by equity shares, preference shares and debentures, and recommend one.
Try it first, then show the solutionSolution
- Equity shares: no fixed payment in a poor year, but new voting owners dilute control and dividends later share profits.
- Preference shares: fixed dividend and little voting power, so control is kept; dividend is a fixed burden but payable only from profit.
- Debentures: owners keep full control and debenture interest is a fixed charge that must be paid even in a loss; assets can serve as security, which this company has.
- Recommendation: since the owners do not want to share control and assets are available, debentures or preference shares fit; if profits are very uncertain, preference shares are safer because the dividend depends on profits. Choose preference shares.
Answer: Preference shares keep control and avoid compulsory payment in a loss; debentures also keep control but carry fixed interest.
Where students lose marks in Equity Shares, Preference Shares and Debentures
The slips examiners see most often, and what to write instead.
Mistake: Calling debenture holders owners
They have invested money.
Wrong working
Debenture holders are owners.
Right working
They are creditors; shareholders are owners.
Do this: Money lent is a debt.
Usually costs: 2 marks.
Mistake: Saying equity dividend is fixed
Confusion with preference.
Wrong working
Equity shareholders get a fixed rate.
Right working
Equity dividend depends on profit; preference dividend is fixed.
Do this: Fixed means preference or debenture interest.
Usually costs: 1-2 marks.
Mistake: Applying the dividend rate to the number of shares
Face value is ignored.
Wrong working
Dividend = 9% of 4,000.
Right working
Dividend = 9% of 4,000 x 100 = ₹36,000.
Do this: Use capital (number x face value).
Usually costs: 2 marks.
Mistake: Writing the capital market as a market for machines
The word capital is misread.
Wrong working
Capital market is the market for capital goods.
Right working
It is the market for long-term funds, where shares and debentures are issued and traded.
Do this: Think securities.
Usually costs: 1 mark.
Exam tips
- In dividend sums, find capital first (number x face value), then apply the rate.
- Always write preference dividend before equity dividend.
- In shares versus debentures write at least four bases: status, return, voting, repayment.
- Short-term bank loans are meaning only: one line each is enough.
Practice questions on Equity Shares, Preference Shares and Debentures
Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.
Q1 · 2 marks · Very short answerBoard level
State two features of equity shares.
Hint
Vote and risk.
Answer
Equity shareholders have voting rights and elect the directors; their dividend is not fixed and depends on profit.
Q2 · 4 marks · Short answerHarder board level
Suppose a company has issued 5,000 debentures of ₹100 each at 12 per cent interest. Find the yearly interest and state what happens if the company makes a loss.
Hint
Face value times rate.
Answer
Debenture capital = 5,000 x 100 = ₹5,00,000. Interest = 12% of 5,00,000 = ₹60,000 a year. Debenture holders are creditors, so the interest must be paid even if the company makes a loss.
Q3 · 4 marks · Short answerHarder board level
Explain why preference shares are said to combine features of equity shares and debentures.
Hint
Share capital but fixed rate.
Answer
Like equity shares they form part of the share capital, and dividend is paid only out of profits. Like debentures they carry a fixed rate of return and a priority claim, as the dividend and the repayment of capital come before equity. They therefore stand between the two.
Q4 · 4 marks · Short answerHarder board level
State four differences between equity shares and preference shares.
Hint
Dividend, repayment, vote, risk.
Answer
Dividend: equity is variable, preference is fixed. Repayment on winding up: preference first, equity last. Voting: equity has voting rights, preference generally not. Risk: equity bears more risk and may earn more.
Q5 · 4 marks · Case-basedHOTS / competency
Suppose a shareholder says, "Debentures are better than shares because the interest is always paid." Evaluate the statement from the point of view of the company and of the investor.
Hint
Fixed return versus growth.
Answer
For the investor, debentures give a steady, safer return and are repaid before shareholders, but no vote and no share in the growth of profits. For the company, interest is a burden that must be paid even in a loss, so too many debentures increase risk. Shares can earn more in good years but may give nothing in poor ones. The better choice depends on the investor's need for safety and the company's capacity to pay.
Test your recall
Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.
1.Who are the owners of a company?Show answer
Equity shareholders.
2.Are debentures owned capital or borrowed capital?Show answer
Borrowed capital.
3.Which shareholders are repaid first on winding up?Show answer
Preference shareholders (before equity).
4.Which body regulates the capital market in India?Show answer
SEBI.
5.What is overdraft?Show answer
A facility to draw more than the balance in a current account up to an agreed limit.
Equity Shares, Preference Shares and Debentures: frequently asked questions
Can a company pay equity dividend without paying preference dividend?
No. Preference dividend is paid first.
Do debenture holders have voting rights?
No.
What is the face value of a share?
The nominal value printed on it, for example ₹10 or ₹100.