Direct finance is a method of financing where borrowers borrow funds directly from the

financial market A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial market ...

without using a third party service, such as a

financial intermediary A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds ...

. This is different from indirect financing where a financial intermediary takes the money from the lender with an interest rate and lends it to a borrower with a higher interest rate. Direct financing is usually done by borrowers that sell

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

and/or shares to raise money and circumvent the high interest rate of financial intermediary (banks). We may regard transactions as direct finance, even when a financial intermediary is included, in case no asset transformation has taken place. An example is a household which buys a newly issued government bond through the services of a broker, when the bond is sold by the broker in its original state. Another good example for direct finance is a business which directly buys newly issued commercial papers from another business entity

References

Securities (finance) Stock market Financial markets {{Finance-stub

See also

References