I recently read a very interesting article from Market Watch titled, “Even Companies are Avoiding the Stock Market” which provided some very interesting stats about the size and attributes of the stock market. It begs the question why aren’t more companies going public.
The Size of the United States Stock Market
When you are discussing the stock market as a whole most people go right to the Dow Jones or S&P 500. The Dow Jones Industrial Average tracks 30 large US Companies while the S&P 500 tracks the largest 500 US Companies…however, there is an even more encompassing index, the Wilshire 5000. According to the Wilshire Site,
The Wilshire 5000 Total Market IndexSM is widely accepted as the definitive benchmark for the U.S. equity market, and measures performance of all U.S. equity securities with readily available price data. Named for the nearly 5,000 stocks it contained at launch, it then grew to a high count of 7,562 on July 31, 1998. Since then, the count fell steadily to 3,776 as of December 31, 2013, where it has then bounced back to 3,818 as of September 30, 2014. The last time the Wilshire 5000 actually contained 5,000 or more companies was December 29, 2005.
The Wilshire 5000 base is its December 31, 1980 capitalization of $1,404.596 billion; therefore, the index can serve as an excellent approximation of dollar changes in the U.S. equity market in billions of dollars. For example, index values of 2157.146 on December 30, 1985 and 2164.690 on December 31, 1985 represent an approximate increase of $7.5 billion. Over time, the index and market value track away from this near one-to-one billion relationship because of additions and deletions to where the relationship as of December 2013 is a single point in the Wilshire 5000 represents about $1.15 billion in index market value. Barron’s was first to publish the Wilshire 5000 Index on January 13, 1975. Now, the Wilshire 5000 is updated every second as part of the NASDAQ ticker feed.
Marketwatch did a fantastic job of overlaying the market cap vs number of stocks:
As the graph show there are significantly less public companies, as a whole, then in years past. It should be noted that like most things in life the market cap is top heavy, such that, the top 500 (S&P 500) companies covers 80% of the total capitalization of the US stock market.
Why are the Amount of Public Companies Decreasing?
The author, Mark Hubert, offers some reasons as to he thinks the amount of public companies are decreasing,
- The bursting of the Internet bubble is perhaps the most obvious, since many of the companies that went public during the go-go years of the late 1990s didn’t survive the ensuing bear market. By the end of 2002, for example, the Wilshire 5000’s membership count was 2,000 less than what it had been in mid-1998.
- Mergers and acquisitions have also been a factor: M&A activity has been surging over the last several years, and in recent months reached all-time record levels.
- Yet another cause is the smaller number of companies going public. During the 1990s, for example, according to data from University of Florida finance professor Jay Ritter, 4,361 companies came to market. During the aughts decade that followed, in contrast, just 1,009 did — less than a quarter as many. And in the current decade, even with a pickup in IPO activity in the last couple of years, the pace of companies going public is less than a third of what it was in the 1990s.
Respectfully, I think Mr. Hubert missed two reasons why there are less public companies:
- Public companies have a ton more compliance issues! To go public today is much harder and more expensive than it was 10 years ago, which was harder and more expensive than 10 years before that.
- SEC got a lot better at stopping pump and dump garbage penny stock fraud. Are pump and dumps still around? I am sure of it, but I’d be willing to there are less schemes than 10 years ago.