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1 1 (January 4, 2021)

handle is hein.crs/goveanw0001 and id is 1 raw text is: ,s Congressional Research Service Informingc the legislative d bate siic 1914 0 Updated January 4, 2021 Introduction to Financial Services: Capital Markets This In Focus provides an overview of U.S. capital markets, Securities and Exchange Commission (SEC) regulation, and related policy issues. Market Composition Capital markets are where securities like stocks and bonds are issued and traded. U.S. capital markets instruments include (1) stocks, also called equities or shares, referring to ownership of a firm; (2) bonds, also called fixed income or debt securities, referring to the indebtedness or creditorship of a firm or a government entity; and (3) shares of investment funds, which are forms of pooled investment vehicles that consolidate money from investors. As a main segment of the financial system, capital markets provide the largest sources of financing for U.S. nonfinancial companies. U.S. capital markets provided 72% of the financing for nonfinancial firms in 2019 (Figure 1). By contrast, capital markets play a less prominent role in other major economies. Figure I. Capital Markets Financing Compared with Bank Loans for Nonfinancial Firms Other - 17% 13% 17% Bank loans 0 11 De bt CM 0u 3% Equity CM 6% 56% U.S. Euro Area Japan China Source: CRS, using data from SIFMA. Notes: CM = capital markets. Data as of 2019, except for China, which is as of 2017. Key Players Participants in U.S. capital markets include companies and municipalities that issue securities, broker-dealers, investment companies (i.e., mutual funds and private equity), investment advisers, securities exchanges, institutional investors, and retail investors. The SEC and various self-regulatory organizations (SROs) are the principal regulators of the markets. Fundamental Concepts Regulatory Philosophy. The SEC's regulatory philosophy for capital markets is different than that of banking regulators. The SEC is principally concerned with disclosure, on the theory that investors should have sufficient access to information from companies issuing stocks and bonds to enable investors to make informed decisions on whether to invest and at what price level to compensate for their risks. Banking regulators, by contrast, focus more on safety and soundness to avoid bank failure. This is largely because bank deposits are often ultimately guaranteed by the taxpayers, whereas in capital markets, investors generally assume all the risk of loss. Public and Private Securities Offerings. The SEC requires that offers and sales of securities, such as stocks and bonds, either be registered with the SEC or undertaken pursuant to a specific exemption. The goal of registration is to ensure that investors receive key information on the securities being offered. Registered offerings, often called public offerings, are available to all types of investors. By contrast, securities offerings that are exempt from certain registration requirements are referred to as private offerings or private placements. Private offerings are available to institutions or individual investors who meet certain net-worth, income, or technical expertise thresholds. 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 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 market structures-for example, national securities exchanges, broker-dealers, and service firms-are essential enablers of secondary market trading and liquidity, which are important to the markets' overall health and efficiency. Poic Issues Coronavirus Disease 2019 (COVID-19) has had profound effects on U.S. capital markets, which have in turn attracted attention from Congress and federal regulators. Although some policy focus may have changed since the pandemic, Congress continues to consider a broad range of issues. COVID-19 and Federal Government Capital Markets Intervention. The spread of COVID-19 induced heavy capital markets selloffs and rebounds in 2020. The crisis- induced stress conditions have been broadly felt in all corners of capital markets-stocks, bonds, investment funds, and other segments have all experienced heightened >orts.congress.go

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