Direct finance

Direct financing is usually done by borrowers that sell securities and/or shares to raise money and circumvent the high interest rate of financial intermediary (banks).

[1] We may regard transactions as direct finance, even when a financial intermediary is included, in case no asset transformation has taken place.

This process fosters efficient capital allocation by allowing entities to issue securities, such as stocks and bonds, directly to investors.

By bypassing intermediaries, direct finance reduces transaction costs, enhances transparency, and provides a platform for price discovery, where market forces determine the value of securities.

For instance, corporations may issue bonds directly to investors, streamlining the funding process while requiring participants to navigate market complexities independently.