Question

i)    Explain direct, indirect finance, financial instruments, and financial institutions. Why do they exist?

ii) Explain financial markets? When are they primary or secondary, and debt or equity markets and why?

Answer 1

i) Direct Finance is the one in which the borrower directly issues securities into the market and get money from the financial markets. Indirect Finance is the one in which the borrower gets money through a financial intermediary. Financial instruments are different asset classes namely gold, stock, bonds etc., Financial Institutions are insurance companies, banks, mutual funds etc., who involve in carrying out the financial transactions in regulated manner. They do exist because they want to satisfy all sort of borrower needs.

ii) Financial markets are the one where the trade takes place. For example, stock, derivative, bonds etc., Primary market is the one where the investor buys the security directly from the company. eg: IPO Secondary market is the one where the investor buys the secrity from the other investor. eg: Exchanges.Debt market is the place where the bonds are traded and equity market is the place where the stocks are traded. When the company is about to enter public, they release shares in th primary markets so they exist.