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The Shrinking Number of Stocks in the Stock Market

by Kevin Kroskey, CFP®, MBA

The U.S. stock market has long been a cornerstone of American capitalism, allowing companies to raise capital and gain visibility. Recently, however, there’s been a decline in the number of publicly traded companies, with many businesses opting to stay private. This trend, combined with the rise of private market investing, has reshaped the investment landscape, influenced by factors like regulatory burdens, the appeal of private equity, and shifting investor preferences.

In 1996, around 8,000 companies were publicly traded in the U.S., but by 2023, this number had dropped to about 4,000, even as the economy and the formation of new businesses grew. Startups that previously would have gone public now remain private longer, with the average time to IPO increasing from five to ten years. Some prominent companies, like Dell, have even chosen to “go private” after years of being publicly listed.

Why Stay Private?

Regulatory Burdens: The Sarbanes-Oxley Act of 2002, introduced to prevent corporate fraud, increased reporting costs, especially for smaller companies. This has deterred many startups and smaller firms from going public, as private markets offer greater flexibility. Additionally, high costs and complexity are involved with the initial public offering process, which can be avoided by staying private.

Private Funding Availability: Unlike previous decades, companies now have abundant private funding options through private equity, venture capital, and institutional investors. Firms like Uber and SpaceX have stayed private longer, often going public only when investor liquidity demands it.

Control and Flexibility: Private companies avoid the pressure of quarterly earnings reports, allowing CEOs to focus on long-term strategies without the demands of public shareholders. This freedom aligns with many companies’ visions and helps avoid rushed decision-making.

Rise of Private Market Investing

As the number of public companies declines, private market investing has surged. Private equity, venture capital, private credit, and other private investment forms have grown significantly, creating a market once limited to institutional investors but now accessible to more individuals.
Private equity and venture capital have expanded rapidly, especially in technology, fueling growth for companies like Airbnb and Stripe. Investors are drawn to high potential returns from these sectors, given the growth trajectories of tech startups.

New fund structures and alternative investing platforms allow accredited investors to access private companies, private real estate, and other assets once reserved for institutions. This has opened private markets to a broader range of investors.

Many family offices, sovereign wealth funds, and pension funds have long diversified their portfolios with private market allocations, and those allocations have generally increased over the years. Ohio Public Employee Retirement System or OPERS, as an example, has an “Alternatives” allocation range of 23% to 43% of the pension fund. Private equity falls within this category and is 10% to 20% of the fund, making up 23% of the combined private and public equity allocation as of March 2024.

Increasing Returns and Portfolio Diversification: Private market investments may offer diversification benefits, appealing to investors seeking alternatives to traditional stocks and bonds. While these investments come with lower liquidity, their potential for returns often exceeds the stock market, driving demand for private investment options.

Impact on Investors

The rise of private markets and the shrinking pool of public companies present both challenges and opportunities for the average investor. On the one hand, fewer public companies mean fewer opportunities for retail investors. Often, the companies that do go public are already mature, with their peak growth behind them. For example, when Facebook and Google went public, they were already dominant in their markets.

Meanwhile, the growth of private investment platforms offers new avenues for retail investors, although many options remain limited to accredited or high-net-worth individuals. The challenge lies in democratizing access to these markets while managing risks, such as lower liquidity and increased complexity.

Private markets are expected to keep growing. This shift from public to private seems likely to continue to impact public markets, potentially leading to a scenario where only large, capital-intensive companies go public. For everyday investors, this trend highlights the need for additional sources of diversification and the importance of access to quality alternative investments. And while access is necessary, it is far from sufficient. You or your advisor must not only understand these strategies but thoughtfully integrate them into your own investment, financial, and tax plans.

While the traditional stock market remains relevant, it’s no longer the only place for growth. As companies embrace private markets, the investment landscape is evolving with both opportunities and risks. Never a bad time for a competent second opinion.

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Kevin Kroskey, CFP^®, MBA is the Founder of True Wealth Design, providing “Accounting, Tax & Wealth Solutions To Help You Plan Smarter and Live Better.” This article is for educational purposes only. The strategies referenced apply to Accredited Investors or Qualified Purchases per SEC regulations. To explore how these strategies may apply to you, call or email kkroskey@truewealthdesign.com.

Opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.