By Phil Mackintosh, Senior Economist, Nasdaq
The U.S. stock market has more than 5,600 listed companies worth more than $58 trillion, and has traded almost 11 billion shares or $450 billion in notional value every day so far in 2021. The market includes a wide range of companies, from large established players to new, small, growth companies.
In this holiday-shortened week, we take a quick look at how large, small and microcap companies contribute to the total market cap and liquidity that makes the U.S. markets the envy of the world.
The Russell 3000 almost fits in the top half
As a starting point, we rank all of the listed companies by market capitalization and then divide them into quartiles (four equal groups, first column in Chart 1).
With more than 5,600 listed companies, almost all of the Russell 3000 companies fit in the top half of the market (blue and green). That leaves a lot of companies that are only included in total market indexes.
Chart 1: Breakdown of the U.S. stock market
But the boom half of the market is small
However, as the second column in Chart 1 shows, the companies in the bottom half of the market add to a total market cap of less than $800 billion. That’s smaller than our single largest company (and a few other Nasdaq-listed companies below that)!
The smallest quartile (brown color), comprising more than 1,400 companies, doesn’t even show up on this chart, adding to just over $150 billion in market capitalization (Table 1).
Table 1: The data behind the breakdown
But the bottom half trade more equally
Despite their small market cap, the smallest quartile of stocks add to around 15% of average daily volume (ADV). That’s over 1.6 billion shares each day. In contrast, the largest cap stocks make up more than 95% of all market cap, but fewer than half of the nearly 11 billion shares that trade each day.
That’s partly because smaller stocks have lower stock prices, so you need to trade more shares to invest the same amount of money. We’ve also shown that retail investors seem to like those low priced stocks, and the growth in retail in the past year has also boosted proportion of trading in these low market cap stocks.
However, as we’ve said before, shares and liquidity are different things.
Looking instead at the value traded each day (ADVT), large cap pull back to over 86% of all liquidity and over $380 billion—much more in line with their contribution to market capitalization. That’s also why in two recent studies we’ve shown retail’s contribution to liquidity is much lower than its contribution to shares trading.
The second 25% of companies (midcap, green) don’t even add to 10% of all market liquidity. The smallest half of the market trades less than $20 billion each day or less than 4% of all ADVT.
That dichotomy highlights how larger stocks also typically have much higher stock prices, meaning they trade less shares, but still a relatively high amount of value. How that impacts retail investors is something we talked about earlier.
One size fits all really doesn’t fit anyone
What can we learn from this?
Looking at data this way shows how different stocks in our markets are. Our “one size fits all” market makes it easier to remember how trading works, but it fits very few companies well. And that, in turn, explains why experts keep suggesting changes to things like tick sizes, access fees, round lots, fragmentation, short interest and retail trading rules.
At the same time, the broad and varied U.S. market is what makes ETFs thrive, offering multiple opportunities to compile factor and thematic exposures in well diversified and highly liquid portfolios.
The U.S. markets’ diversity is part of what makes it so attractive to investors.
