top of page
  • Writer's pictureRealFacts Editorial Team

The Shrinking Stock Market: Analyzing the Impacts of Working With Less Stocks


Stock market numbers

The Current Landscape


The law of supply and demand posits that when the price of a commodity rises, producers are incentivized to bring more of it to market. However, this principle appears to not hold true in global stock markets. Despite stock prices climbing to near-record levels, the supply of publicly listed stocks is shrinking. Today there are around 3,672 on the Nasdaq before there was up to 8,000 before 2000, and still decreasing. This phenomenon is perplexing and warrants a deep dive into the underlying causes and implications for investors, companies, and the broader economy.


Global stock markets have seen impressive gains, with share prices rising by approximately 17% over the past year. This surge brings stock valuations close to historic highs. However, contrary to what one might expect, the number of publicly listed companies is dwindling. CEO of JPMorgan Chase, Jamie Dimon, highlighted that the pace of company listings has slowed significantly, as net equity issuance remains negative. In the first part of this year alone, equity issuance net of stock buybacks was negative $120 billion, the lowest figure since 1999. High-profile companies like ByteDance, OpenAI, Stripe, and SpaceX, despite their colossal valuations, remain private. The question is, why?


Reasons Behind the Decline

1. Increased Private Financing Options:

The rise of private equity and venture capital has fundamentally altered the funding landscape. Private-equity funds managed $8.2 trillion by mid-2023, more than double the amount in 2018. This surge in available private capital allows companies to stay private longer, reducing the pressure to go public for funding.


2. Regulatory and Reporting Burdens:

Jamie Dimon, CEO of JPMorgan, points to the demands for environmental, social, and governance (ESG) reporting and the pressures of quarterly earnings reports as significant deterrents for companies considering going public. Public companies are subject to rigorous disclosure requirements, which can be burdensome and detract from long-term strategic goals.


3. Shift to Intangible Assets:

The nature of business assets has shifted dramatically over the past few decades. In the 1990s, the stock market was dominated by manufacturing firms with tangible assets like

machinery and real estate. Today, many leading companies generate value from intangible assets such as software, intellectual property, and brand value. These assets are harder to value and disclose, making public markets less appealing. Companies fear that disclosing too much information could lead to competitive disadvantages.


Implications for Stakeholders


1. For Investors:

Public markets are more transparent than private ones, providing critical data on corporate health and market conditions. With fewer listed companies, retail investors and smaller institutional investors have fewer opportunities to invest in high-growth companies. Moreover, the reduced number of public companies may dampen public support for business-friendly policies, as fewer individuals benefit directly from corporate profits.


2. For Companies:

Staying private allows companies to focus on long-term goals without the short-term pressures of quarterly earnings reports. However, it also means they forgo the liquidity and prestige associated with being publicly traded. Additionally, private companies may find it challenging to attract the same level of public scrutiny and investor interest.


3. For the Economy:

The decline in public companies could reduce overall market transparency, complicating efforts by regulators to monitor financial stability. This opacity could lead to a misallocation of resources and potential financial instability if significant risks go unnoticed.


Potential Solutions


1. Regulatory Adjustments:

Regulators could impose stricter requirements on large private companies, ensuring they meet some of the same standards as public companies. Alternatively, reducing the disclosure requirements for public companies could make going public more attractive. The Jumpstart Our Business Startups (JOBS) Act of 2012, which aimed to simplify the IPO process, had mixed results, boosting IPOs but often resulting in lower-quality offerings.


2. Encouraging Quality Listings:

Policies could focus on incentivizing high-quality companies to go public. This might involve offering tax benefits, grants, or other financial incentives to companies that meet certain criteria of stability and growth potential.


3. Leveraging Private Equity Greed:

Ironically, the best hope for revitalizing public markets might lie in the profit motives of private equity investors. These investors eventually need to liquidate their holdings, and public markets provide an ideal exit route. As private equity funds currently sit on trillions in unsold assets, pressure from investors seeking returns could drive more companies to go public.


The Role of Alternative Markets


While the number of exchange-listed companies has decreased, alternative trading systems like OTC Markets have seen growth. The number of securities traded on OTC Markets reached approximately 11,500 in 2020, more than double the total from a decade earlier. These markets offer a platform for smaller and early-stage companies to access public capital without the stringent requirements of major exchanges.


We have discussed much of the facts behind the Nasdaq which is what many Investors focus their attention to. However including OTC markets the global markets offer a whopping 55, 214 listed companies for investors retail and institutional to invest into. These companies are spread out among several exchanges and counties. With that knowledge there is a large number of stones to be turned over and explore the opportunities globally.


The decline in the number of publicly listed companies amidst rising stock prices presents a complex challenge. While private markets offer numerous benefits, the transparency and accessibility of public markets are crucial for a healthy economy. Balancing these needs requires thoughtful regulation and innovative solutions to encourage more companies to go public without compromising their strategic goals. As private equity funds continue to grow and seek profitable exits, there remains hope that the allure of public markets will persist, ensuring a dynamic and transparent economic environment.

コメント


bottom of page