The Number of Publicly Traded Companies Is Shrinking. Here's Why That's a Bad Thing

You'll often hear that building a diversified portfolio is the key to growing a lot of wealth in your IRA or brokerage account. And while you don't necessarily need to put money into hundreds of stocks to achieve that goal, it helps to invest in a few dozen.

It also helps to have choices as to where to put your money. But these days, investors have fewer choices than they did in the past. And that's not such a great thing.

There are fewer companies to invest in today

In 1996, there were more than 8,000 companies trading on a public exchange. Today, there are just 3,700.

And it's not because there are fewer companies in business today than there were in the mid-1990s. Rather, it's that more companies are opting to stay private, which means they don't issue stock for investors to buy shares of.

Why might more companies be going this route? Companies commonly issue stock to raise capital for various purposes, like expansion and research and development. Companies that have other ways to raise capital, such as through private investors, may not feel that same need.

Also, there's a benefit to not being a publicly traded company. Businesses in that boat are beholden to certain rules. They need to disclose financial data on a regular basis and adhere to other requirements. Privately traded companies don't have to do all of those things.

This isn't to say that privately held companies don't have to follow general accounting rules and report all of their income for tax purposes. But they also don't have to make their financials public for all of the world to see.

Investors don't get as many choices

The fact that the number of publicly traded companies has shrunk by more than half since the mid-1990s means that investors today have fewer options when it comes to choosing stocks. Now to be clear, an array of 3,700 companies still gives investors a nice amount of choice. And it wouldn't be prudent to hold anywhere close to that number of individual stocks in your brokerage account or IRA, simply because tracking each one just wouldn't be feasible.

But still, if the number of publicly traded companies continues to shrink, it could cause problems for investors down the line. So that's something to be mindful of.

Meanwhile, some investors might struggle to build a portfolio from the pool of 3,700 publicly traded companies on the market today. If you're in that boat, you may not want to buy individual stocks at all. Instead, you may want to fall back on broad market ETFs, or exchange-traded funds.

If you buy shares of an S&P 500 ETF, for example, you'll effectively be putting your money into the 500 largest publicly traded companies today. That's a really easy and effective way to branch out in your portfolio without having to put in the time to research hundreds of companies individually and keep tabs on them over time.