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Updated January 13, 2022
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 such as stocks and
guaranteed by the taxpayers, whereas in capital markets,
bonds are issued and traded. U.S. capital markets
investors generally assume all the risk of loss.
instruments include (1) stocks, also called equity or shares,
referring to ownership of a firm; (2) bonds, also called fixed
Public and Private Securities Offerings. The SEC
income or debt securities, referring to the indebtedness or
requires that offers and sales of securities, such as stocks
creditorship of a firm or a government entity; (3) digital
and bonds, be either registered with the SEC or undertaken
asset securities, referring to digital representations of value
pursuant to a specific exemption. The goal of registration is
in securities form; and (4) shares of investment funds,
to ensure that investors receive key information on the
which are pooled investment vehicles that consolidate
securities being offered. Registered offerings, often called
money from investors.
public offerings, are available to all types of investors. By
contrast, securities offerings that are exempt from certain
As a main segment of the financial system, capital markets
registration requirements are referred to as “private
provide the largest sources of financing for U.S.
offerings” or “private placements.” Private offerings are
nonfinancial companies. U.S. capital markets provided 73%
available to institutions or individual investors who meet
of the financing for nonfinancial firms in 2020 (Figure 1).
certain net worth, income, or technical expertise thresholds.
By contrast, capital markets play a less prominent role in
other major economies.
Retail and Institutional Investors. Investors are often
divided into retail investors (individuals and households)
Figure 1. Capital Markets Financing Compared with
and institutional investors. Retail and institutional investors
Bank Loans for Nonfinancial Firms
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
transactions can occur without affecting the price. Certain
Source: CRS, using data from SIFMA.
market structures—for example, national securities
exchanges, broker-dealers, and service firms—are essential
Notes: Data as of 2020, except for China, which is as of 2017.
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,
COVID-19 has had profound effects on U.S. capital
investment companies (i.e., mutual funds and private
markets, which have in turn attracted attention from
equity), investment advisers, securities exchanges,
Congress and federal regulators. Although some policy
institutional investors, and retail investors. The SEC and
focus may have changed since the pandemic, Congress
various self-regulatory organizations are the principal
continues to consider a broad range of issues.
regulators of the markets.
Fundamental Concepts
COVID-19, Federal Government Capital Market
Interventions, and Capital Market Conditions. The
Regulatory Philosophy. The SEC’s regulatory philosophy
spread of COVID-19 induced heavy capital market selloffs
for capital markets is different than that of banking
and rebounds in 2020. The crisis-induced stress was
regulators. The SEC is principally concerned with
broadly felt in all corners of capital markets—stocks,
disclosure, on the theory that investors should have
bonds, investment funds, and other segments all
sufficient access to information from companies issuing
https://crsreports.congress.gov
Introduction to Financial Services: Capital Markets
experienced heightened volatility. In response, the Federal
pandemic prompted special attention to MMFs, as the Fed
Reserve, sometimes with support from the Department of
responded to the prospect of a run on the industry by
the Treasury, established several emergency facilities to
lending to institutions that purchased certain assets from
provide support for key capital market segments. Changes
MMFs facing redemption requests. The Fed took this step
in the course of the pandemic, other economic factors, and
despite post-financial crisis reforms aimed at strengthening
other government responses, such as the CARES Act (P.L.
the MMF industry’s resilience. In the wake of these
116-136), also likely had significant effects. Following the
disruptions, some commentators flagged the MMF industry
rapid selloff and rebound during the early stages of the
as a problem area in need of further reform.
pandemic, U.S. capital markets experienced record price
Market Structure. Market structure issues often relate to
appreciation across many asset classes, including stocks,
the SEC’s mission to maintain fair and orderly markets.
bonds, and digital assets. Some observers are concerned
Multiple discussions of structural vulnerabilities surfaced
about the sustainability of such market performance and
during recent episodes of stock price volatility at companies
whether the conditions could quickly deteriorate if
such as GameStop. These events have prompted growing
triggering events (e.g., unexpected changes in public health,
support for a holistic examination of the capital markets
government programs, and economic growth) were to
structure to identify potential changes to enhance overall
occur.
market operations. The GameStop event drew policymaker
attention to a broker-dealer revenue model, referred to as
Capital Formation versus Investor Protection. Policy
payment for order flow. Other market-driven discussions
debates involving the capital markets often revolve around
that triggered policy inquiries include settlement cycles,
a perceived tradeoff between capital formation and investor
short selling, and game-like digital engagement practices.
protection (through disclosure and other compliance
In addition, broader market structure issues include the
requirements), two of the SEC’s core missions. Expanded
increased frequency of Treasury securities market
capital formation allows businesses to more easily obtain
disruptions and corporate bond market efficiency.
funding for new projects, which in turn spurs economic
growth. But lax regulations could also leave investors
Digital Assets and Financial Innovation. In recent years,
unprotected against risks such as fraud and market
financial innovation in capital markets has generated new
manipulation. In general, the SEC and lawmakers try to
forms of fundraising—such as initial coin offerings and
focus protections on less-sophisticated retail investors.
crowdfunding—as well as a new and emerging asset class,
However, expanding capital formation and investor
digital assets. Digital assets have a growing presence in the
protection need not always be in conflict. Investor
financial services industry, and in cases where they qualify
protection could contribute to the health and efficiency of
as securities, securities regulation generally applies. Their
capital markets, because investors may be more willing to
increasing use in capital markets raises policy questions
provide capital, and even at a lower cost, if they have faith
regarding whether changes to existing laws and regulations
in the integrity and transparency of the markets.
are warranted and, if so, when such changes should happen,
what form they should take, and which agencies should take
Public versus Private Securities Offerings. The number
the lead. Examples of issue areas include stablecoins,
of U.S.-listed domestic public companies has declined by
digital asset securities exchanges and trading, and questions
close to half since the mid-1990s. At the same time, private
of the SEC’s jurisdiction (in relation to proposals to change
capital markets have surpassed public markets as the
the definition of security). In addressing innovation,
preferred way to raise money. This phenomenon has shaped
policymakers and regulators often walk a fine line between
policy discussions around the capital markets and led to
fostering innovation and protecting investors.
proposals to encourage public offerings, facilitate both
CRS Resources
public and private market efficiency, and enable proper
investor access to private securities market investment
CRS Report R46424, Capital Markets Volatility and
opportunities. In November 2020, the SEC adopted changes
COVID-19: Background and Policy Responses, by Eva Su
to the regulatory framework for private securities offerings.
The new framework expands the size limit on multiple
CRS Report R45957, Capital Markets: Asset Management
types of private offerings and makes it easier for certain
and Related Policy Issues, by Eva Su
companies to communicate with investors and transition
from different offering types.
CRS Report R45221, Capital Markets, Securities Offerings,
and Related Policy Issues, by Eva Su
Asset Management. The asset management industry
collectively manages money for nearly half of all U.S.
CRS Report R46208, Digital Assets and SEC Regulation,
households. The industry has experienced periods of high
by Eva Su
growth largely attributable to retail investors’ increased
reliance on asset managers to invest their money for them
CRS In Focus IF11714, Introduction to Financial Services:
rather than investing the money themselves. This growth in
The Securities and Exchange Commission (SEC), by Gary
the industry has generated financial stability and other
Shorter
concerns. For example, commentators have raised concerns
about certain exchange-traded funds’ risk structures
CRS In Focus IF11256, SEC Securities Disclosure:
(including leveraged and inverse structures) and passive
Background and Policy Issues, by Eva Su
investment strategies, business practices at some private
equity funds, and money market mutual funds (MMFs). The
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 8 · UPDATED