Financial markets are responsible for channeling funds from households, firms, and governments who have saved surplus funds by spending less than their income to those who have a shortage of funds because they wish to spend more than they earn. In short financial intermediaries are responsible for connecting the net borrowers with net savers.
Direct financing occurs when borrowers, borrow funds directly from lenders in financial markets by selling them securities (also called financial instruments), which are claims on the borrower s future income or assets. Indirect financing occurs when financial intermediaries facilitates the linking between the net borrowers and net savers.
Financial intermediaries are institutions responsible for linking the net savers and net borrowers together. Examples of financial intermediaries include banks and insurance companies.
