From the course: Understanding Capital Markets

The shrinking stock market

From the course: Understanding Capital Markets

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The shrinking stock market

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- [Instructor] One important trend you need to be aware of if you're thinking about investing is what I call the shrinking stock market. The size of the US stock market by the number of publicly traded firms peaked in 1998 at roughly 10,000 companies. By 2018, there were about 4,000 stocks traded on the NYSE and the Nasdaq. The shrinking stock market has largely been driven by large companies buying up smaller ones at a consistent rate and by fewer companies going public over time. So what does that mean for individual investors like you and me? Well, for one thing, it means more competition in finding great stocks to invest in. An IPO or Initial Public Offering is the first time that a stock is sold to the general public. Historically, the US often had maybe 300 to 500 IPOs per year. These days, we often have 100 or less IPOs per year. Now the average IPO today is older and more stable than it used to be. Firms like Facebook and Uber provide good examples. Those firms both waited years longer than firms used to in order to go to public. Now why is this bad for investors like us? Well, the answer is that today's IPOs have typically already seen their headiest growth, their fastest growth by the time they go public. A new company is likely to see its fastest growth for an investor early on. And today, many investors miss out on that early growth. Now of course, not all firms that did an IPO ended up being successful, but a handful of stocks like IBM, Amazon, Walmart, and Microsoft have driven a large part of the gains in the US stock market for decades. Now with IPOs happening later and later, it's unclear if investors will see those early gains from a handful of future firms that do turn up the all stars. None of this is to say that you shouldn't invest in the stock market. Returns in the market continue to be roughly consistent with historical averages. And besides, other than the stock market, there aren't many good options for investments. But you do want to be aware of these changing market dynamics and what the shrinking stock market means as you think about investing. Consider assembling a portfolio that is diversified and stable rather than trying to bet on a few stocks like new IPOs to show huge growth.

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