Direct & Indirect Finance

NotesQuiz

Direct Finance

  • This is where borrowers borrow funds directly from lenders (people who saved money) in financial markets by selling them securities (financial instruments).

  • Typically a borrower issues a receipt to the lender promising to pay back the capital. 

    These receipts are securities which may be freely bought or sold. 

    In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends

  • As the financial markets are normally direct and no financial intermediaries used, this is called financial disintermediation

Indirect finance

  • Borrowers obtain funds through financial intermediaries (banks, stock exchanges).

So, Financial markets facilitate

  1. The raising of capital (in the capital markets)

  2. The transfer of risk (in the derivatives markets)

  3. International trade (in the currency markets)

  4. Match those who want capital to those who have it

NotesQuiz