Functions of Financial Markets and Financial Intermediaries

The function is explained through the following figure:

 Those who have saved and lending funds, the Lender Savers are at the left side & those who must borrow funds to finance their spending, the Borrower-Spenders are at the right. The arrows show that Funds flow from lender savers to Borrower – spenders via two routes i.e.; through financial markets (Direct Finance) and through Financial intermediaries i.e. Banks etc. (Indirect Finance)

In direct finance borrowers borrow funds directly from lenders in financial markets by selling them securities or bonds which are claim on borrowers’ future income or assets