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1 1 (January 5, 2023)

handle is hein.crs/govekbq0001 and id is 1 raw text is: Con res&on I Research SerYc nfn 'ning t Lg~ Iat~ e d ,bat. 1§14 0 Updated January 5, 2023 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 Corm position Capital markets are where securities such as stocks and bonds are issued and traded. U.S. capital markets instruments include (1) stocks, also called equity 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; (3) digital asset securities, referring to digital representations of value in securities form; and (4) shares of investment funds, which are 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 75.4% of the financing for nonfinancial firms in 2021 (Figure 1). By contrast, capital markets play a less prominent role in other major economies. Figure I. Financing for Nonfinancial Firms Other-. 15% 12% 16% Loa -. 11 20 26% Bonds . 79% 26% 7.- Equity--@ U.S. Euro Area UK Japan Source: CRS, using data from SIFMA. Notes: Data as of 2021. Euro Area = 19 EU member states using the Euro. Other = insurance reserves, trade credits, and trade advances. 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, various self-regulatory organizations, and state securities regulators are the principal regulators of the markets. Fundam-ental Concepts Regulatory Philosophy. 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. The SEC's regulatory philosophy for capital markets is different than that of banking regulators. 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, be either 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. Policy Issues Capital Formation versus Investor Protection. Policy debates involving capital markets often revolve around a perceived tradeoff between capital formation and investor protection (through disclosure and other compliance requirements), two of the SEC's core missions. Expanded capital formation allows businesses to more easily obtain funding for new projects, which in turn spurs economic growth. But lax regulations could also leave investors unprotected against risks such as fraud and market manipulation. In general, the SEC and lawmakers try to focus protections on less-sophisticated retail investors. However, expanding capital formation and investor

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