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Updated January 4, 2021
Introduction to Financial Services: Capital Markets
This In Focus provides an overview of U.S. capital markets,
stocks and bonds to enable investors to make informed
Securities and Exchange Commission (SEC) regulation,
decisions on whether to invest and at what price level to
and related policy issues.
compensate for their risks. Banking regulators, by contrast,
focus more on safety and soundness to avoid bank failure.
Market Composition
This is largely because bank deposits are often ultimately
Capital markets are where securities like stocks and bonds
guaranteed by the taxpayers, whereas in capital markets,
are issued and traded. U.S. capital markets instruments
investors generally assume all the risk of loss.
include (1) stocks, also called equities or shares, referring to
ownership of a firm; (2) bonds, also called fixed income or
Public and Private Securities Offerings. The SEC
debt securities, referring to the indebtedness or creditorship
requires that offers and sales of securities, such as stocks
of a firm or a government entity; and (3) shares of
and bonds, either be registered with the SEC or undertaken
investment funds, which are forms of pooled investment
pursuant to a specific exemption. The goal of registration is
vehicles that consolidate money from investors.
to ensure that investors receive key information on the
securities being offered. Registered offerings, often called
As a main segment of the financial system, capital markets
public offerings, are available to all types of investors. By
provide the largest sources of financing for U.S.
contrast, securities offerings that are exempt from certain
nonfinancial companies. U.S. capital markets provided 72%
registration requirements are referred to as “private
of the financing for nonfinancial firms in 2019 (Figure 1).
offerings” or “private placements.” Private offerings are
By contrast, capital markets play a less prominent role in
available to institutions or individual investors who meet
other major economies .
certain net-worth, income, or technical expertise thresholds.
Figure 1. Capital Markets Financing Compared with
Retail and Institutional Investors. Investors are often
Bank Loans for Nonfinancial Firms
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
are where securities are created, through public and private
securities offerings. The secondary markets are where
securities are traded, through buying and selling activities,
to provide “liquidity” for existing securities. Liquidity is a
common term that measures how quickly and easily
Source: CRS, using data from SIFMA.
transactions can occur without affecting the price. Certain
Notes: CM = capital markets. Data as of 2019, except for China,
market structures—for example, national securities
which is as of 2017.
exchanges, broker-dealers, and service firms—are essential
enablers of secondary market trading and liquidity, which
Key Players
are important to the markets’ overall health and efficiency.
Participants in U.S. capital markets include companies and
Policy Issues
municipalities that issue securities, broker-dealers,
Coronavirus Disease 2019 (COVID-19) has had profound
investment companies (i.e., mutual funds and private
effects on U.S. capital markets, which have in turn attracted
equity), investment advisers, securities exchanges,
attention from Congress and federal regulators. Although
institutional investors, and retail investors. The SEC and
some policy focus may have changed since the pandemic,
various self-regulatory organizations (SROs) are the
Congress continues to consider a broad range of issues.
principal regulators of the markets.
Fundamental Concepts
COVID-19 and Federal Government Capital Markets
Intervention. The spread of COVID-19 induced heavy
Regulatory Philosophy. The SEC’s regulatory philosophy
capital markets selloffs and rebounds in 2020. The crisis -
for capital markets is different than that of banking
induced stress conditions have been broadly felt in all
regulators. The SEC is principally concerned with
corners of capital markets —stocks, bonds, investment
disclosure, on the theory that investors should have
funds, and other segments have all experienced heightened
sufficient access to information from companies issuing
https://crsreports.congress.gov
Introduction to Financial Services: Capital Markets
volatility. In response, the Federal Reserve (Fed),
despite post-financial crisis reforms aimed at strengthening
sometimes with support from the Treasury Department,
the MMF industry’s resilience. In the wake of these
established several emergency facilities to provide support
disruptions, some commentators flagged the MMF industry
for key capital markets segments. The SEC also took
as a problem area in need of further regulatory reform.
actions to monitor price movements and ensure orderly
market functions. Some of the SEC’s existing tools to
Investment Advice. Some policymakers have shown
manage market volatility—market-wide and single-stock
continued interest in the standard of care governing
halts—were triggered at an unprecedented rate at the peak
securities brokers who offer financial advice to retail
of market volatility to allow investors to pause and digest
investors. In 2019, the SEC adopted “Best Interest”
information during fast-paced market movements. Changes
standards to improve the quality and transparency of
in the course of the pandemic, other economic factors, and
financial advice. This package of rules and interpretations
other government responses, such as the CARES Act (P.L.
has been the focus of significant congressional attention,
116-136), also likely had significant effects.
with some commentators criticizing the SEC for not going
further and subjecting brokers to a fiduciary standard.
Capital Formation Versus Investor Protection. Policy
debates involving the capital markets often revolve around
Securities Trading. Sophisticated electronic trading and
perceived tradeoff between capital formation and investor
computer programs now dominate capital markets trading
protection, two of the SEC’s core missions. Expanded
and research, making data availability and accessibility for
capital formation allows businesses to more easily obtain
affected institutions a key policy issue. Some policymakers
funding for new projects, which in turn spurs economic
have expressed concern about the fees national exchanges
growth. But lax regulations could also leave investors
charge for market participants to access data. SROs are
unprotected against risks such as fraud and market
working to develop and implement a consolidated audit trail
manipulation. In general, the SEC and lawmakers try to
(CAT), which could provide a single database for regulators
focus protections on less-sophisticated retail investors.
to track all U.S.-listed equities and options. According to
However, expanding capital formation and investor
the SEC, CAT is “intended to enable regulators to oversee
protection need not always be in conflict. Investor
the securities markets on a consolidated basis—and in so
protection could contribute to the health and efficiency of
doing, better protect these markets and investors.” Other
capital markets, because investors may be more willing to
trading-related issues include transparency and oversight of
provide capital, and even at a lower cost, if they have faith
alternative trading systems, high frequency trading, and the
in the integrity and transparency of the markets.
standards for listing and delisting companies from national
securities exchanges.
Public Versus Private Securities Offerings. The number
of U.S.-listed domestic public companies has declined by
Digital Assets and Financial Innovation. In recent years,
close to half since the mid-1990s. At the same time, private
financial innovation in capital markets has generated new
capital markets have surpassed public markets as the
forms of fundraising—such as initial coin offerings and
preferred way to raise money. This phenomena has shaped
crowdfunding—as well as a new and emerging asset class,
policy discussions around the capital markets and led to
digital assets. Some policymakers hope to clarify
proposals to encourage public offerings, facilitate both
uncertainties involving the regulation of digital assets, such
public and private market efficiency, and enable proper
as the circumstances in which these assets qualify as
investor access to private securities market investment
“securities” and the regulation of digital-asset trading and
opportunities. In November 2020, the SEC adopted changes
custody. Congress has passed legislation to facilitate certain
to the regulatory framework for private securities offerings.
types of innovation. For example, Title III of the Jumpstart
The new framework expands the size limit on multiple
Our Business Startups Act (JOBS Act; P.L. 112-106)
types of private offerings and makes it easier for certain
created an exemption from the Securities Act’s registration
companies to communicate with investors and transition
requirements for certain crowdfunding activities. In
from different offering types.
addressing innovative technologies, policymakers and
regulators often walk a fine line between encouraging
Asset Management. The asset management industry
innovation and protecting investors.
collectively manages money for nearly half of all U.S.
households. The industry has experienced periods of high
CRS Resources
growth largely attributable to retail investors’ increased
CRS Report R46424, Capital Markets Volatility and
reliance on asset managers to invest their money for them
COVID-19: Background and Policy Responses, by Eva Su
rather than investing the money themselves. This growth in
the industry has generated certain financial stability
CRS Report R45957, Capital Markets: Asset Management
concerns. Among other things, commentators have raised
and Related Policy Issues, by Eva Su
concerns about certain exchange-traded funds’ structure and
passive investment style, the risk of funds that invest in
CRS Report R45221, Capital Markets, Securities Offerings,
leveraged loans, and money market mutual funds (MMFs).
and Related Policy Issues, by Eva Su
The pandemic prompted special attention to MMFs, as the
CRS Report R46208, Digital Assets and SEC Regulation,
Fed responded to the prospect of a run on the industry by
by Eva Su
lending to institutions that purchased certain assets from
MMFs facing redemption requests. The Fed took this step
Eva Su, Analyst in Financial Economics
https://crsreports.congress.gov
Introduction to Financial Services: Capital Markets
IF11062
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https://crsreports.congress.gov | IF11062 · VERSION 6 · UPDATED