Identifying the Marginal Investor

The marginal investor in a firm is the investor who is most likely to be trading at the margin and therefore has the most influence on the pricing of its equity. In some cases, this may be a large institutional investor, but institutional investors themselves can differ in several ways. The institution may be a taxable mutual fund or a tax-exempt pension fund, may be domestically or internationally diversified, and vary on investment philosophy. In some cases, the marginal investors may be individuals, and here again there can be wide differences depending upon how diversified these individuals are, and what their investment objectives may be. In still other cases, the marginal investors may be insiders in the firm who own a significant portion of the equity of the firm and are involved in the management of the firm.

While it is difficult to identify the marginal investor in a firm, we would begin by breaking down the percent of the firm's stock held by individuals, institutions and insiders in the firm. This information, which is available widely for US stocks, can then be analyzed to yield the following conclusions:

• If the firm has relatively small institutional holdings but substantial holdings by wealthy individual investors, the marginal investor is an individual investor with a significant equity holding in the firm. In this case, we have to consider how diversified that individual investor's portfolio is to assess project risk. If the individual investor is not diversified, this firm may have to be treated like a private firm, and the cost of equity has to include a premium for all risk, rather than just non-diversifiable risk. If on the other hand, the individual investor is a wealthy individual with significant stakes in a large number of firms, a large portion of the risk may be diversifiable.

• If the firm has small institutional holdings and small insider holdings, its stock is held by large numbers of individual investors with small equity holdings. In this case, the marginal investor is an individual investor, with a portfolio that may be only partially diversified. For instance, phone and utility stocks in the United States, at least until recently, had holdings dispersed among thousands of individual investors, who held the stocks for their high dividends. This preference for dividends meant, however, that these investors diversified across only those sectors where firms paid high dividends.

• If the firm has significant institutional holdings and small insider holdings, the marginal investor is almost always a diversified, institutional investor. In fact, we can learn more about what kind of institutional investor holds stock by examining the top 15 or 20 largest stockholders in the firms, and then categorizing them by tax status (mutual funds versus pension funds), investment objective (growth or value) and globalization (domestic versus international).

• If the firm has significant institutional holdings and large insider holdings, the choice for marginal investor becomes a little more complicated. Often, in these scenarios, the large insider is the founder or original owner for the firm, and often, this investor continues to be involved in the top management of firm. Microsoft and Dell are good examples, with Bill Gates and Michael Dell being the largest stockholders in the firms. In most of these cases, however, the insider owner seldom trades the stock, and his or her wealth is determined by the level of the stock price, which is determined by institutional investors trading the stock. We would argue that the institutional investor is the marginal investor in these firms as well, though the leading stockholder will influence the final decision. Thus, by examining the percent of stock held by different groups, and the largest investors in a firm, we should have a sense of who the marginal investor in the firm is, and how best to assess and risk in corporate financial analysis.

Illustration 3.3: Identifying the Marginal Investor

Who are the marginal investors in Disney, Aracruz and Deutsche Bank? We begin to answer this question by examining whether iinsiders own a significant portion of the equity in the firm and are involved in the top management of the firm. Although no such investors exist at Disney and Deutsche Bank, the voting shares in Aracruz are closely held by its incumbent managers. In Table 8.4, we examine the proportion of stock held in each of the firms by individuals and institutions, with the institutional holding broken down further into mutual fund and other institutional holdings.

Table 3.1: Investors in Disney, Aracruz and Deutsche Bank
Retirement Planning For The Golden Years

Retirement Planning For The Golden Years

If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

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Responses

  • martha
    How to identify marginal investor?
    7 years ago
  • tommi
    Who are marginal investors?
    7 years ago
  • Kenneth
    How to identify a marginal investors.?
    7 years ago
  • calliope
    Who are the marginal investors in a private firm?
    7 years ago
  • cassio
    Is individual a marginal investor?
    7 years ago
  • Isembard
    What is the marginal investors in stock?
    3 years ago
  • mara
    Who is the marginal investor of this stock?
    3 years ago
  • THOMAS
    What are marginal shareholders?
    2 years ago
  • alem
    Who is a marginal investor in starbucks?
    1 year ago
  • logan
    How to identify marginal investors examples?
    8 months ago
  • KATHLEEN
    How to identify marginal investor and nonmarginal investor?
    7 months ago
  • LEWIS
    How to find nonmarginal investor?
    7 months ago
  • lloyd
    Who is the marginal investor in sleep number corp?
    7 months ago
  • lina
    Why is marginal investor well diversiified?
    7 months ago
  • TIMO
    Which best describes marginal investor?
    3 months ago
  • paul
    Are the owners of a firm the marginal investors?
    3 months ago
  • Lily
    What is marginal invesotors?
    2 months ago

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