Question

When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

True

False

Answer 1

this statement is true;

The marginal investor is the one who trades at the margin and sets prices. No one can really tell who the marginal investor is, but it is reasonable to conclude that

• if most of the stock is held by institutional investors, that the marginal investor is an institutional investor
• if the stock is closely held, and if one or more of the large stockholders is part of the top management (or the CEO), that the marginal investor is the insider. This will be true even if he or she does not trade.