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Updated January 8, 2019
Introduction to Financial Services: Capital Markets
This In Focus provides an overview of U.S. capital markets,
regulators. The SEC’s primary concern is information
Securities and Exchange Commission (SEC)-related
disclosure, on the theory that investors should have
regulation, and their policy issues.
sufficient access to information from companies issuing
stocks and bonds to enable investors to make informed
Market Composition
decisions on whether to invest and at what price level to
Capital markets are where securities, such as stocks and
compensate for their risks. Banking regulators, by contrast,
bonds, are issued and traded. U.S. capital markets are
focus more on financial institutions’ risk control and
generally composed of (1) around $32 trillion in stocks,
mitigation. This is largely because most bank deposits are
also called equities or shares, referring to ownership of a
ultimately guaranteed by the taxpayers, whereas in capital
firm; and (2) around $37 trillion in bonds, also called fixed
markets, investors generally assume all the risk of loss and
income or debt securities, referring to the indebtedness or
receive risk-adjusted investment returns.
creditorship of a firm or a government entity. Capital
markets are also composed of additional asset classes, such
Public and private securities offerings. The SEC requires
as derivatives, which derive value from other underlying
that offers and sales of securities, such as stocks and bonds,
assets. As a main segment of the financial system, capital
either be registered with the SEC or be undertaken with an
markets provide the largest sources of financing for U.S.
exemption from certain registration requirements. The goal
nonfinancial companies. As Figure 1 shows, capital
of registration is to ensure that investors receive key
markets provide 65% of financing for nonfinancial firms
information on the securities being offered. Registered
compared with 13% for bank lending, which is higher than
offerings, often called public offerings, are available to all
the Euro Area, Japan, and China.
types of investors. By contrast, securities offerings that are
exempt from certain registration are referred to as private
Figure 1. Capital Markets Financing Compare with
offerings or private placements. Various private offerings
Bank Lending for Nonfinancial Firms
are available to institutions or individual investors with
certain financial or income wherewithal.
Retail and institutional investors. Investors are often
divided into retail investors (individuals and households)
and institutional investors. Retail and institutional investors
are generally perceived as having different capabilities to
process information, comprehend investment risks, and
sustain financial losses. In general, retail investors are
thought to warrant more protection from inadequate
disclosure and education than institutional investors.
Primary and secondary markets. The primary markets
Source: CRS, using data from SIFMA.
are where securities are created, through public and private
Notes: CM = capital markets. Data presented as of 2016, except for
securities offerings. The secondary markets are where
China, which is presented as of 2014.
securities are traded, through buying and selling activities,
to provide “liquidity” for these existing securities. Liquidity
Key Players
is a common term that measures how quickly and easily
Participants in U.S. capital markets include about 8,000
transactions can occur without affecting the price. Certain
reporting companies, of which approximately 4,300 are
market structures—for example, trading venues, broker-
exchange-listed public companies; more than 26,000
dealers, and service firms—are essential enablers of
investment advisers, mutual funds, exchange-traded funds,
secondary market trading and liquidity, which are important
broker-dealers, and other registered entities; and millions of
to the overall health and efficiency of capital markets.
retail and institutional investors domestically and abroad.
Policy Issues
U.S. capital markets are mainly regulated by the SEC, state
Congress may consider a number of broad policy issues
securities regulators, self-regulatory organizations (SROs),
related to U.S. capital markets.
and the Commodity Futures Trading Commission, which
generally regulates derivatives markets.
Capital formation versus investor protection. Capital
markets policy debates often revolve around perceived
Fundamental Concepts
tradeoffs between expanding capital formation and
Regulatory philosophy. The SEC’s regulatory philosophy
protecting investors, two of the SEC’s core missions.
for capital markets is different than that of banking
Expanding capital formation allows for greater access to
https://crsreports.congress.gov
Introduction to Financial Services: Capital Markets
investment opportunities for more investors and increased
investors. In 2018, the SEC proposed a package of “Best
funding for businesses. Nevertheless, expanded capital
Interest” standards to improve the quality and transparency
formation could also lead to concerns over whether
of financial advice. This proposal is not yet finalized but
investors are adequately protected from unreasonable risks
has been the focus of significant congressional attention.
of making certain investments. In general, the SEC and
lawmakers seek to ensure that less sophisticated retail
Capital markets data and data access. Sophisticated
investors have access to, and full comprehension of, the risk
electronic trading and computer programs now dominate
disclosures of their investments. Expanding capital
capital markets trading and research, making data
formation and investor protection, however, need not
availability and accessibility for affected institutions a key
always be in conflict. Investor protection could contribute
policy issue. Some policymakers have expressed concern
to the health and efficiency of capital markets, because
about the increase in fees national exchanges charge for
investors may be more willing to provide capital, and even
market participants to access data. SROs are working to
at a lower cost, if they have faith in the integrity and
develop and implement a consolidated audit trail (CAT),
transparency of the underlying markets.
which could provide a single database for regulators to
track all U.S.-listed equities and options. According to the
Public versus private securities offerings. The number of
SEC, CAT is “intended to enable regulators to oversee the
U.S.-listed domestic public companies has declined by half
securities markets on a consolidated basis—and in so doing,
since the mid-1990s. At the same time, private capital
better protect these markets and investors.”
markets have now surpassed public markets as the preferred
way to raise money. This phenomena has shaped policy
Financial innovation. In recent years, financial innovation
discussions around the capital markets and led to proposals
in capital markets has brought new forms of fundraising as
to encourage public offerings, facilitate both public and
well as a new and emerging asset class—initial coin
private market liquidities, and enable proper investor access
offerings, crowdfunding, and digital assets. It has also
to investment opportunities.
created integrated services that are building on the existing
markets and platforms, such as robo-advisory services for
Short-term versus long-term corporate thinking. Short-
providing financial advice. Some innovation has also led to
termism refers to corporate stakeholders making decisions
new regulation. For example, Title III of Jumpstart Our
based on an earlier economic payoff rather than the long-
Business Startups Act (JOBS Act; P.L. 112-106) created a
term prospects of a company or society. Some
regulation regarding securities-based crowdfunding.
policymakers have advocated various proposals to
Nevertheless, many other financial innovations operate
encourage long-term corporate thinking, including (1)
under the existing regulatory framework without tailored
allowing public companies to stop giving quarterly
regulatory approaches. Policymakers and regulators walk a
reporting and earnings guidance, to avoid perceived success
fine line between providing regulatory clarity and investor
or failure to be measured quarterly; (2) mandating
protection and preventing the unintended hindrance to
individual companies’ capital allocation decisions give
financial innovation, financial inclusion, and technological
priority to research and development expenditures that are
advancements. Although no clear consensus has formed on
perceived to generate long-term prospects, instead of
what new regulations, if any, are appropriate, financial
certain share buybacks that reportedly have the potential to
innovation practices affect the lives of millions of
boost executive compensation linked to short-term stock
Americans and will likely continue to be a source of
prices; (3) scrutinizing so-called shareholder activism-
congressional interest.
related voting practices that some consider prioritize short-
term gain over long-term shareholder value creation; and
CRS Resources
(4) considering the extent to which lawmakers or the SEC
CRS Report R45221, Capital Markets, Securities Offerings,
should mandate that companies report their environmental,
and Related Policy Issues, by Eva Su
social, and governance practices.
CRS In Focus IF10032, Introduction to Financial Services:
Asset management. According to Financial Times and The
The Securities and Exchange Commission (SEC), by Gary
Wall Street Journal, since the Great Recession, assets and
Shorter
influence have shifted from banks to asset management
firms. Some argue that with tightened banking regulation,
CRS Report R45308, JOBS and Investor Confidence Act
risks have transferred to certain capital markets segments
(House-Amended S. 488): Capital Markets Provisions,
rather than the banking system. For example, some raise
coordinated by Eva Su
systemic risk concerns regarding exchange-traded funds
that act as mechanisms to provide liquidity in market
CRS Report R45318, Exchange-Traded Funds (ETFs):
segments that are structurally illiquid. Others argue that
Issues for Congress, by Eva Su
asset managers are increasingly holding high-risk positions,
such as leveraged loans, that could pose systemic risk
CRS In Focus IF10747, Private Securities Offerings:
concerns. But the extent that certain structures would or
Background and Legislation, by Eva Su
would not disrupt the financial system is a topic of debate.
CRS In Focus IF11004, Financial Innovation: Digital
Investment advisers. Some policymakers have shown
Assets and Initial Coin Offerings, by Eva Su
continued interest in the standard of care applied to the
investment advice financial advisors provide to retail
Eva Su, Analyst in Financial Economics
https://crsreports.congress.gov
Introduction to Financial Services: Capital Markets
IF11062
Disclaimer
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https://crsreports.congress.gov | IF11062 · VERSION 4 · NEW