Final answer:
Direct finance when households invest in primary securities has the disadvantages of higher risk, lack of diversification, and limited liquidity.
Step-by-step explanation:
Disadvantages of Direct Finance When Households Invest in Primary Securities:
- Higher Risk: When households invest directly in primary securities, they expose themselves to higher risk compared to other savings options like bank deposits or mutual funds. The value of primary securities can fluctuate greatly, leading to potential losses.
- Lack of Diversification: Direct finance often involves investing in a single security or a small number of securities, which limits diversification. This lack of diversification increases the risk of investment losses in case those securities perform poorly.
- Limited Liquidity: Primary securities may have limited liquidity, meaning they cannot be easily converted into cash. If a household needs quick access to their funds, they may face challenges in selling their securities quickly and at a fair price.