Introduction to Financial Services: Capital Markets
link to page 1 
Updated April 12, 2023
Introduction to Financial Services: Capital Markets
This In Focus provides an overview of U.S. capital markets,
compensate for their risks. The SEC’s regulatory
Securities and Exchange Commission (SEC) regulation,
philosophy for capital markets is different than that of
and related policy issues.
banking regulators. Banking regulators, by contrast, focus
more on safety and soundness to avoid bank failure. This is
Market Composition
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
available to institutions or individual investors who meet
75.4% of the financing for nonfinancial firms in 2021
certain net worth, income, or technical expertise thresholds.
(Figure 1). 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. Financing for Nonfinancial Firms
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: Data as of 2021. Euro Area = 19 EU member states using the
market structures—for example, national securities
euro. Other = insurance reserves, trade credits, and trade advances.
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
municipalities that issue securities, broker-dealers,
Policy Issues
investment companies (i.e., mutual funds and private
Capital Formation versus Investor Protection. Policy
equity), investment advisers, securities exchanges,
debates involving capital markets often revolve around a
institutional investors, and retail investors. The SEC,
perceived tradeoff between capital formation and investor
various self-regulatory organizations, and state securities
protection (through disclosure and other compliance
regulators are the principal regulators of the markets.
requirements), two of the SEC’s core missions. Expanded
capital formation allows businesses to more easily obtain
Fundamental Concepts
funding for new projects, which in turn spurs economic
Regulatory Philosophy. The SEC is principally concerned
growth. But lax regulations could also leave investors
with disclosure, the theory being that investors should have
unprotected against risks such as fraud and market
sufficient access to information from companies issuing
manipulation. In general, the SEC and lawmakers try to
stocks and bonds to enable investors to make informed
focus protections on less-sophisticated retail investors.
decisions on whether to invest and at what price level to
However, expanding capital formation and investor
https://crsreports.congress.gov
Introduction to Financial Services: Capital Markets
protection need not always be in conflict. Investor
mission to maintain fair and orderly markets. Multiple
protection could contribute to the health and efficiency of
discussions of structural vulnerabilities surfaced during
capital markets, because investors may be more willing to
episodes of stock price volatility. For example, the
provide capital, and even at a lower cost, if they have faith
GameStop event drew policymaker attention to a revenue
in the integrity and transparency of the markets.
model in which broker-dealers receive payment from
market makers for routing trades, referred to as payment for
Public versus Private Securities Markets. The number of
order flow. Other market-driven discussions that triggered
U.S.-listed domestic public companies has declined by
policy inquiries include settlement cycles and game-like
close to half since the mid-1990s. At the same time, private
digital engagement practices. In addition, broader market
capital markets have surpassed public markets as the
structure issues include the increased frequency of Treasury
preferred way to raise money. This phenomenon has shaped
securities market disruptions and corporate bond market
policy discussions around the capital markets and led to
efficiency. According to a number of observers, the root
proposals to encourage public offerings, facilitate both
cause of the increased Treasury market disruptions relates
public and private market efficiency, and enable proper
to the rapid growth of the market size that outstripped
investor access to private securities market investment
dealers’ intermediation and market-making capacity.
opportunities. Some observers are concerned that the
Proposed policy options include ways to enhance market-
growth in private offerings could hinder equal access to
making capacity, mandate central clearing of more Treasury
investment opportunities and investment portfolio
market trading, increase market oversight and transparency,
diversification. Their policy proposals aim to expand the
and establish new trading venues.
size and eligibility of investor access to certain private
Digital Asset Investments. The SEC is the primary
securities offerings or make certain public securities
regulator overseeing securities offers, sales, and investment
offering processes easier. Other observers are concerned
activities, including those involving digital assets. In cases
about investor protection and the lack of transparency in
where the digital assets are securities, the SEC has both (1)
private securities markets. They believe that the opacity of
enforcement authority that allows the SEC to bring civil
large private securities markets could pose risks related to
enforcement actions, such as anti-fraud and anti-
market disruptions and misallocation of capital. Their
manipulation actions, for securities laws violations after the
policy proposals aim to increase private securities market
fact; and (2) regulatory authority, including over digital
regulatory oversight and reporting.
asset securities, which could include registration
requirements, oversight, and principles-based regulation.
Asset Management. The asset management industry
Activities in non-security digital asset markets are not
collectively manages money for nearly half of all U.S.
subject to the same safeguards as those established in
households. The industry has experienced periods of high
securities markets. Examples of such safeguards include
growth largely attributable to retail investors’ increased
certain rules and regulations that encourage market
reliance on asset managers to invest their money for them
transparency, conflict-of-interest mitigation, investor
rather than investing the money themselves. This growth in
protection, and orderly market operations. Policymakers
the industry has generated financial stability and other
have proposed amendments to the SEC’s jurisdiction to
concerns. Some observers view money market mutual funds
bridge this perceived regulatory gap.
as needing further reform as the industry has repeatedly
received government assistance during periods of market
CRS Resources
volatility. Policy proposals include rolling back some
CRS Report R47431, Capital Markets: Overview and
earlier reform provisions that were not functioning as
Selected Policy Issues in the 118th Congress
expected, removing incentives for certain investor behavior
that could trigger systemic risk concerns, increasing
CRS Report R47309, Money Market Mutual Funds: Policy
transparency, and reducing portfolio risks.
Concerns and Reform Options
Private equity (PE) funds—which pool investor money to
CRS Report R47053, Private Equity and Capital Markets
purchase company shares with the aim of selling them after
Policy
changing the portfolio companies’ structure or operations—
also face continual policy debates. The PE industry has
CRS Report R46424, Capital Markets Volatility and
gained more importance because of the significant growth
COVID-19: Background and Policy Responses
of the private securities and private funds markets. Some
academic research suggests that PE enhances competition,
CRS Report R45957, Capital Markets: Asset Management
enables capital formation, assists distressed company
and Related Policy Issues
resolution, and transforms financially underperforming
companies. However, some observers have raised financial
stability concerns in light of the industry’s growth in size,
CRS Report R45221, Capital Markets, Securities Offerings,
and Related Policy Issues
importance, and complexity. The PE industry draws
additional policy debates regarding its performance records,
CRS Report R46208, Digital Assets and SEC Regulation
operational practices, and industry-specific issues,
including the compatibility of PE’s profit maximization
CRS In Focus IF11714, Introduction to Financial Services:
practices with certain public-service-oriented industries.
The Securities and Exchange Commission (SEC)
Market Structure. Market structure issues involve how
securities are bought and sold and often relate to the SEC’s
Eva Su, Analyst in Financial Economics
https://crsreports.congress.gov
Introduction to Financial Services: Capital Markets
IF11062
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11062 · VERSION 10 · UPDATED
Updated April 12, 2023
Introduction to Financial Services: Capital Markets
This In Focus provides an overview of U.S. capital markets,
compensate for their risks. The SEC’s regulatory
Securities and Exchange Commission (SEC) regulation,
philosophy for capital markets is different than that of
and related policy issues.
banking regulators. Banking regulators, by contrast, focus
more on safety and soundness to avoid bank failure. This is
Market Composition
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
available to institutions or individual investors who meet
75.4% of the financing for nonfinancial firms in 2021
certain net worth, income, or technical expertise thresholds.
(Figure 1). 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. Financing for Nonfinancial Firms
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: Data as of 2021. Euro Area = 19 EU member states using the
market structures—for example, national securities
euro. Other = insurance reserves, trade credits, and trade advances.
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
municipalities that issue securities, broker-dealers,
Policy Issues
investment companies (i.e., mutual funds and private
Capital Formation versus Investor Protection. Policy
equity), investment advisers, securities exchanges,
debates involving capital markets often revolve around a
institutional investors, and retail investors. The SEC,
perceived tradeoff between capital formation and investor
various self-regulatory organizations, and state securities
protection (through disclosure and other compliance
regulators are the principal regulators of the markets.
requirements), two of the SEC’s core missions. Expanded
capital formation allows businesses to more easily obtain
Fundamental Concepts
funding for new projects, which in turn spurs economic
Regulatory Philosophy. The SEC is principally concerned
growth. But lax regulations could also leave investors
with disclosure, the theory being that investors should have
unprotected against risks such as fraud and market
sufficient access to information from companies issuing
manipulation. In general, the SEC and lawmakers try to
stocks and bonds to enable investors to make informed
focus protections on less-sophisticated retail investors.
decisions on whether to invest and at what price level to
However, expanding capital formation and investor
https://crsreports.congress.gov
Introduction to Financial Services: Capital Markets
protection need not always be in conflict. Investor
mission to maintain fair and orderly markets. Multiple
protection could contribute to the health and efficiency of
discussions of structural vulnerabilities surfaced during
capital markets, because investors may be more willing to
episodes of stock price volatility. For example, the
provide capital, and even at a lower cost, if they have faith
GameStop event drew policymaker attention to a revenue
in the integrity and transparency of the markets.
model in which broker-dealers receive payment from
market makers for routing trades, referred to as payment for
Public versus Private Securities Markets. The number of
order flow. Other market-driven discussions that triggered
U.S.-listed domestic public companies has declined by
policy inquiries include settlement cycles and game-like
close to half since the mid-1990s. At the same time, private
digital engagement practices. In addition, broader market
capital markets have surpassed public markets as the
structure issues include the increased frequency of Treasury
preferred way to raise money. This phenomenon has shaped
securities market disruptions and corporate bond market
policy discussions around the capital markets and led to
efficiency. According to a number of observers, the root
proposals to encourage public offerings, facilitate both
cause of the increased Treasury market disruptions relates
public and private market efficiency, and enable proper
to the rapid growth of the market size that outstripped
investor access to private securities market investment
dealers’ intermediation and market-making capacity.
opportunities. Some observers are concerned that the
Proposed policy options include ways to enhance market-
growth in private offerings could hinder equal access to
making capacity, mandate central clearing of more Treasury
investment opportunities and investment portfolio
market trading, increase market oversight and transparency,
diversification. Their policy proposals aim to expand the
and establish new trading venues.
size and eligibility of investor access to certain private
Digital Asset Investments. The SEC is the primary
securities offerings or make certain public securities
regulator overseeing securities offers, sales, and investment
offering processes easier. Other observers are concerned
activities, including those involving digital assets. In cases
about investor protection and the lack of transparency in
where the digital assets are securities, the SEC has both (1)
private securities markets. They believe that the opacity of
enforcement authority that allows the SEC to bring civil
large private securities markets could pose risks related to
enforcement actions, such as anti-fraud and anti-
market disruptions and misallocation of capital. Their
manipulation actions, for securities laws violations after the
policy proposals aim to increase private securities market
fact; and (2) regulatory authority, including over digital
regulatory oversight and reporting.
asset securities, which could include registration
requirements, oversight, and principles-based regulation.
Asset Management. The asset management industry
Activities in non-security digital asset markets are not
collectively manages money for nearly half of all U.S.
subject to the same safeguards as those established in
households. The industry has experienced periods of high
securities markets. Examples of such safeguards include
growth largely attributable to retail investors’ increased
certain rules and regulations that encourage market
reliance on asset managers to invest their money for them
transparency, conflict-of-interest mitigation, investor
rather than investing the money themselves. This growth in
protection, and orderly market operations. Policymakers
the industry has generated financial stability and other
have proposed amendments to the SEC’s jurisdiction to
concerns. Some observers view money market mutual funds
bridge this perceived regulatory gap.
as needing further reform as the industry has repeatedly
received government assistance during periods of market
CRS Resources
volatility. Policy proposals include rolling back some
CRS Report R47431, Capital Markets: Overview and
earlier reform provisions that were not functioning as
Selected Policy Issues in the 118th Congress
expected, removing incentives for certain investor behavior
that could trigger systemic risk concerns, increasing
CRS Report R47309, Money Market Mutual Funds: Policy
transparency, and reducing portfolio risks.
Concerns and Reform Options
Private equity (PE) funds—which pool investor money to
CRS Report R47053, Private Equity and Capital Markets
purchase company shares with the aim of selling them after
Policy
changing the portfolio companies’ structure or operations—
also face continual policy debates. The PE industry has
CRS Report R46424, Capital Markets Volatility and
gained more importance because of the significant growth
COVID-19: Background and Policy Responses
of the private securities and private funds markets. Some
academic research suggests that PE enhances competition,
CRS Report R45957, Capital Markets: Asset Management
enables capital formation, assists distressed company
and Related Policy Issues
resolution, and transforms financially underperforming
companies. However, some observers have raised financial
stability concerns in light of the industry’s growth in size,
CRS Report R45221, Capital Markets, Securities Offerings,
and Related Policy Issues
importance, and complexity. The PE industry draws
additional policy debates regarding its performance records,
CRS Report R46208, Digital Assets and SEC Regulation
operational practices, and industry-specific issues,
including the compatibility of PE’s profit maximization
CRS In Focus IF11714, Introduction to Financial Services:
practices with certain public-service-oriented industries.
The Securities and Exchange Commission (SEC)
Market Structure. Market structure issues involve how
securities are bought and sold and often relate to the SEC’s
Eva Su, Analyst in Financial Economics
https://crsreports.congress.gov
Introduction to Financial Services: Capital Markets
IF11062
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11062 · VERSION 10 · UPDATED