Incredibly Shrinking Markets

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It's a small world after all -- of stocks, that is. The number of U.S. stocks trading is much smaller than it used to be.

In fact, as of Sept. 1, there were just 3,267 names in theUniversity of Chicago's Center for Research in Securities Prices(CRSP) Deciles 1-10 index, a representation of the U.S. equity market. That number is the lowest since 1984, and nearly 50% below the peak of 6,364 reached in 1997, according to an analysis conducted by Steven DeSanctis, equity strategist at Jefferies.

Why are there fewer stocks out there? For one thing, fewer companies are going public.

From 1980 to 2000, an average of 311 companies went public annually, according to a 2012 SECstudy. But in the decade starting in 2001, the average dropped to 99 IPOs per year.

In 2000 -- the peak of the dotcom boom -- 407 companies went public, according to FactSet. But after the dotcom bubble burst, the IPO market took a tumble, and itnever bounced back.

In the first nine months of 2000, 355 companies went public. This year, only 73 companies listed their shares over that same period.

Why the shift away from IPOs? Many companies simply don't need to tap the public markets, as there aremore avenuesthan ever for securing financing, includingprivate funding.

"They're getting funding through private equity" and other sources, such as mutual fund companies, DeSanctis said.

At the same time, private equity firms -- a key driver of IPOs -- are increasinglyselling portfolio companies to private investorsas opposed to taking the companies public.

Some theorize that companies are choosing to remain private to avoid the costs and obligations associated with being a public company. TheSarbanes-Oxley Act of 2002 addedmany compliance rules for public companies. Because they have fewer regulatory obligations, private entities can cut down on the costs of hiring accountants and lawyers and filing regularly with the SEC.

Meanwhile, brisk M&A activity in recent years has also helped shrink the universe of stocks.

M&A surged in the post-recession years as companies looked for new ways to pursue growth and tospend their cashas the economy struggled to recover. Add to that private equity firms awash with cash to spend after years on hold during the crisis, along with low borrowing costs, and you have a recipe for a hot market for takeover transactions.

M&A deal volume involving both public and private companies in the U.S. jumped from 7,267 deals in 2009 to 13,075 in 2015, according to FactSet. While deal activity this year has softened somewhat, it remains strong: There were 8,749 U.S. deals from the beginning of 2016 through Sept. 30, versus 5,276 deals across the same time period in 2009.

At the end of the day, though, whether the universe of stocks gets smaller or bigger, the rules of sound investing remain the same.Consider your personal financial situation, as well as your tolerance for risk. Do your due diligence. Learn about a stock, or any other type of investment, before you make a commitment, large or small.

An Alert Investor is a smarter investor.

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