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1 1 (January 8, 2019)

handle is hein.crs/govycr0001 and id is 1 raw text is: Cogesoa Reeac Seric 0 Updated January 8, 2019 Introduction to Financial Services: Capital Markets This In Focus provides an overview of U.S. capital markets, Securities and Exchange Commission (SEC)-related regulation, and their policy issues. Market Composition Capital markets are where securities, such as stocks and bonds, are issued and traded. U.S. capital markets are generally composed of (1) around $32 trillion in stocks, also called equities or shares, referring to ownership of a firm; and (2) around $37 trillion in bonds, also called fixed income or debt securities, referring to the indebtedness or creditorship of a firm or a government entity. Capital markets are also composed of additional asset classes, such as derivatives, which derive value from other underlying assets. As a main segment of the financial system, capital markets provide the largest sources of financing for U.S. nonfinancial companies. As Figure 1 shows, capital markets provide 65% of financing for nonfinancial firms compared with 13% for bank lending, which is higher than the Euro Area, Japan, and China. Figure I. Capital Markets Financing Compare with Bank Lending for Nonfinancial Firms Other - 23 1 Bank Lend, Fi ng Debt CM 1% 50% U.S. Euro Area Japan China Source: CRS, using data from SIFMA. Notes: CM = capital markets. Data presented as of 2016, except for China, which is presented as of 2014. Key Players Participants in U.S. capital markets include about 8,000 reporting companies, of which approximately 4,300 are exchange-listed public companies; more than 26,000 investment advisers, mutual funds, exchange-traded funds, broker-dealers, and other registered entities; and millions of retail and institutional investors domestically and abroad. U.S. capital markets are mainly regulated by the SEC, state securities regulators, self-regulatory organizations (SROs), and the Commodity Futures Trading Commission, which generally regulates derivatives markets. Fundamental Concepts Regulatory philosophy. The SEC's regulatory philosophy for capital markets is different than that of banking regulators. The SEC's primary concern is information 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 financial institutions' risk control and mitigation. This is largely because most bank deposits are ultimately guaranteed by the taxpayers, whereas in capital markets, investors generally assume all the risk of loss and receive risk-adjusted investment returns. 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 be undertaken with an exemption from certain registration requirements. 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 are referred to as private offerings or private placements. Various private offerings are available to institutions or individual investors with certain financial or income wherewithal. 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 these 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, trading venues, broker- dealers, and service firms-are essential enablers of secondary market trading and liquidity, which are important to the overall health and efficiency of capital markets. Policy ssues Congress may consider a number of broad policy issues related to U.S. capital markets. Capital formation versus investor protection. Capital markets policy debates often revolve around perceived tradeoffs between expanding capital formation and protecting investors, two of the SEC's core missions. Expanding capital formation allows for greater access to

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