Stock Markets are Shrinking
April 21, 2024
There are significantly less publicly traded shares available to individual investors, writes Peter Watson.
Investors can purchase publicly traded shares of companies they wish to invest. This can be via a direct purchase or by owning a mutual fund that has acquired shares.
Most portfolios have a strong allocation to stocks and therefore the declining number of shares available could be a concern.
In 1996 the number of publicly traded companies in the US was 7,300. Now that figure has shrunk to 4,300.
The significance of a 40 per cent decline in the number of publicly traded companies is during this time additional companies have been created. You would expect there be more publicly traded companies available to invest, not less.
Private equity is a growing segment of the market. A private equity firm buys the shares of a publicly listed firm, and that firm is no longer able to be purchased through a stock exchange.
In other instances, a growing firm that could have converted to being publicly traded can stay private while raising funds from private equity investors.
There are pros and cons of both public market stocks as well as their private market counterparts.
The decision an investor will make is whether to expand their stock selection process to include an “alternative” to just owning publicly traded stocks and add stocks owned through private equity firms.
These alternative investments are often referred to as “alternatives” or “alts” for short.
Alternatives are also another way to invest in income producing assets like publicly traded bonds or bond funds.
From an investor’s perspective alternative investments provide competition to the traditional publicly traded investment options. The more options available to investors the more competitive these options must be.
The challenge for investors is to determine how best to create their own investment portfolio. Decide the allocation between stocks and bonds and whether this should be by publicly traded options or include non-publicly traded “alternatives.”
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com
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