How do direct investments differ from indirect investments?

The distinction between direct and indirect investments is primarily based on the manner in which the investor gains exposure to an asset. Direct investments refer to the acquisition of tangible assets, such as real estate properties or businesses, where the investor has direct ownership and control over the asset. This ownership allows the investor to directly benefit from the income generated by the asset and potentially its appreciation in value.

On the other hand, indirect investments involve purchasing financial instruments, such as stocks, bonds, or mutual funds, that represent a claim on the underlying assets without holding them directly. This means the investor does not have direct control over the assets and must rely on the performance of these instruments, which in turn are influenced by the underlying assets.

The key aspect that makes the answer correct is that direct investments provide the investor with direct ownership and management, while indirect investments provide a way to invest in assets without the need for direct ownership, allowing for diversification and access to different markets without the complexities of managing physical assets.