Borrowing money from a depositor and lending it to the people who need it is called “indirect financing”. Giving money directly to the people who need it is called “direct financing”.

Direct vs Indirect Finance

Indirect Finance

Borrowing money from depositors and lending it to people who need it is called “indirect financing”. A typical indirect financing product is the “bank deposit” you all know. The mechanism of bank deposit is as follows.

• The depositor deposits money in the bank.
• Banks lend the money to other people or companies.
• Banks get interest (*) from those who lend money.
• In addition, the bank pays interest to the depositor.

Direct Finance

Direct finance is to invest money directly in those who need it . The main direct financial products include stocks and bonds.
In the case of direct financing, the side that makes money is called an “investor.” Investors buy shares and bonds from companies, national and local governments, etc. they want to invest in directly. And you will receive dividends and interest.

Role of securities firms in direct finance

The role of a securities company in direct finance is to mediate between investors and issuers of stocks and bonds (company and national / local governments) and investors. For example, when a company issues a bond and raises funds to start a new business, it is difficult for the company to find a person to purchase the bond. Therefore, the brokerage company receives commissions from companies and sells brokerage bonds.

Banks that handle bank deposits, which are products of indirect financing, make money from the “interest between lending money and the interest paid to depositors”, while securities firms make money from “intermediation fees.”