Question

what´s the meaning of marginal investor?

Answer 1

The argument that diversification reduces an investor’s exposure to risk is clear
both intuitively and statistically, but risk and return models in finance go further. The
models look at risk through the eyes of the investor most likely to be trading on the
investment at any point in time, i.e. the marginal investor. They argue that this investor,
who sets prices for investments, is well diversified; thus, the only risk that he or she cares
about is the risk added on to a diversified portfolio or market risk. This argument can be
justified simply. The risk in an investment will always be perceived to be higher for an
undiversified investor than for a diversified one, since the latter does not shoulder any
firm-specific risk and the former does. If both investors have the same expectations about
future earnings and cash flows on an asset, the diversified investor will be willing to pay
a higher price for that asset because of his or her perception of lower risk. Consequently,
the asset, over time, will end up being held by diversified investors.

Answer 2

The marginal investor in a firm is the investor who is most likely to be the buyer or seller on the next trade and to influence the stock price.

Generally speaking, the marginal investor in a stock has to own a lot of stock and also trade a lot.

Since trading is required, the largest investor may not be the marginal investor, especially if he or she is a founder/manager of the firm (Michael Dell at Dell Computers or Bill Gates at Microsoft)

In all risk and return models in finance, we assume that the marginal investor
is well diversified.