WHAT SHRINKING STOCK MARKET MEANS FOR YOUR MONEY

Mom-and-pops are finding it harder to get in at ground level

Hoping to get in early on the next Amazon before it becomes, well, the next Amazon?

Good luck. It’s not as easy as it used to be.

That’s because the number of U.S. stocks has been shrinking for 20 years. At last count, there were 3,599 in the Wilshire 5000 Total Market Index, which tracks all stocks actively traded in America. That’s down more than 50% from the 1997 peak of 7,459.

The smaller pool of stocks to invest in has been driven by a number of factors. Fewer young companies are opting to sell their shares to the public through initial public offerings, or IPOs. Mergers have eliminated many stocks. The rise of private equity firms, which buy entire companies and run them privately with the goal of fixing them up and boosting profitability, has taken hundreds of stocks out of circulation.

And every remaining stock is under the microscope like never before.

Here’s how fewer stocks affect mom-and-pop investors.

1 MISSING OUT ON FUTURE WINNERS

With young companies more frequently opting to get money from private investors instead of through IPOs, small investors have a harder time getting early access to upstarts that could be the disrupters of tomorrow, such as Amazon and Facebook.

“The primary disadvantage is that (small investors) are not getting an opportunity to buy stocks when they are in the biggest part of their growth phase,” bemoans Jason Trennert, chairman of Strategas Research Partners. “You have less to pick from the most exciting parts of the market. Silicon Valley is a crown jewel of the economy, and the average person is not being allowed to fully participate (in those early-stage companies) directly.”

He notes that Amazon, which went public in May 1997, had a first-day market value of roughly $440 million. Amazon’s market cap is now $473.2 billion, according to S&P Dow Jones Indices. By contrast, Snap, the parent company of popular photo app Snapchat, went public in March. At its offering price of $24 per share, it had a market value of roughly $33 billion on its first day. The takeaway: Tens of billions of dollars of newly created wealth were enjoyed by early SNAP investors — professionals, but who excluded mom-and-pops.

2 FEWER STOCKS, HARDER TO GAIN EDGE

While individual investors might miss out on gains generated by private companies, both Main Street and Wall Street investors are equally hamstrung by a smaller pool of stocks to choose from. Why? It is even harder to get market-beating returns because the smaller number of shares that are trading are over-analyzed and picked over, which means fewer stocks are temporarily mispriced, says Bill Hornbarger, chief investment officer at Moneta Group.

“You have more eyes looking at fewer companies,” Hornbarger says. “That makes it harder to beat stock indexes (such as the Standard & Poor’s 500). There’s too much money chasing the same opportunities.”

3 UP-AND-COMER ACCESS THROUGH FUNDS

But not all is lost. Individual investors can gain access to private companies via mutual funds. Fund tracker Morningstar says about 3.6% of the mutual funds it monitors, including well-known companies such as Fidelity Investments and T. Rowe Price, held investments in private companies, according to second-quarter 2016 data. The most widely held private company investments were Uber, cloud storage play Dropbox and lodging app Airbnb.

Funds make investments in high-potential private companies to get a piece of the business at a lower price than they might at the IPO and to generate better returns, says Katie Reichart, associate director at Morningstar.

But individual investors who own private companies through funds that own hundreds of other stocks should not expect turbocharged returns. A $10,000 investment, for example, in a single stock that doubles in value will net a $10,000 profit. But a similar-sized investment in a fund that owns 200 other stocks will net a smaller gain because the investment is spread out.

“You have more eyes looking at fewer companies ... There’s too much money chasing the same opportunities.” Bill Hornbarger, chief investment officer at Moneta Group.