Direct finance is a transaction between two parties where one party lends directly to the other party, whereas indirect finance involves three parties: the borrower, the lender, and a third partylong dashsuch as a bank. Which involves financial intermediaries, and which involves financial markets?

Direct financing involves the financial market and indirect financing involves intermediaries. In the financial market, companies put their shares for sale and investors buy them. This is a direct financing mechanism for companies, which raise funds by sharing their own capital in traded shares.

On the contrary, if a company seeks bank financing, there will necessarily be intermediation by third parties, such as banks. In the middle market, economic agents deposit their money with the bank, and the bank uses it to lend to companies. This is intermediating a financing. Both types of financing are widely used, all will depend on the structure and purpose of each company in the search for financing.