A recent Wall Street Journal article, citing a study by the Center for Research in Security Prices, tells us something remarkable about the times we are investing in: the number of stocks on the U.S. market has quietly diminished by more than half over the last 20 years. In November 1997, investors could choose from 7,355 U.S. stocks. Today, there are fewer than 3,600.
Why haven’t you noticed this? Most of the decline has come from vanishing companies ranging from small to microcap—the sort of names you probably haven’t heard of. Small stocks have diminished from more than 2,500 in 1997 to fewer than 1,200 today. Microcap companies that are even smaller numbered nearly 4,000 in 1997, compared to 1,900 today. Some went out of business, while others were gobbled up by private equity firms. Meanwhile, the ecology has changed; instead of new companies going public to replace those that have retired from the market, venture capital firms are allowing younger ventures to stay private for longer.
The article talks about several possible consequences. Since the surviving companies tend to be larger and better known, it becomes harder for professional asset managers to get an information edge or find small undiscovered gems that are undervalued. The declining roster of stocks may also mean that a long era of higher returns from small cap stocks compared to larger firms could be coming to an end. But the truth is that nobody knows what the investment consequences will be from the quiet shrinkage of investment options.
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