There are several ways to tell a story. Writers can choose to let the characters do all of the talking or they can summarize what their characters say for the reader. The first case is known as direct speech. The second case is known as reported speech. In this passage from Alice in Wonderland, you can see examples of direct speech.
The Caterpillar and Alice looked at each other for some time in silence: at last the Caterpillar took the hookah out of its mouth, and addressed her in a languid, sleepy voice.
`Who are YOU?' said the Caterpillar.
This was not an encouraging opening for a conversation. Alice replied, rather shyly, `I--I hardly know, sir, just at present-- at least I know who I WAS when I got up this morning, but I think I must have been changed several times since then.'
`What do you mean by that?' said the Caterpillar sternly. `Explain yourself!'
`I can't explain MYSELF, I'm afraid, sir' said Alice, `because I'm not myself, you see.'
In this example you can see a lot of dialogue, which in essence, defines direct speech. Strangely enough direct speech is characteristic of indirect narration.