Hi I have a question regarding the notes on the disadvantages of using market values to value investments. What does the following statement mean: market value reflects the position of the marginal investor rather than the individual (e.g. taxation) Kind regards
Hi - good question! The current market value of a stock will reflect the perceived value of that stock to those who are currently trading it, based on their own circumstances and beliefs. The 'marginal investor' is a notional representation of those current traders. So, for example, if another investor has a different taxation position than that of the marginal investor, they might place quite a different perceived value on the stock. If that stock has tax advantages to them, but not to the marginal investor, they would believe it to have a higher value than is represented by the current trading (ie 'market') value (and vice versa). Hope that helps.
