Have you heard of the term multibagger stocks? If yes, do you know how to spot them and make sure that they get added into your portfolio to maximize your profits from investments? As said before, multibagger stocks when spotted early and invested in can give you a huge leap in financial stability. In this article, we’ll be discussing more on multibagger stocks.
What are multibagger stocks?
Multibagger stocks can be defined as a company’s equity stock that gives returns several folds higher than the investment made in purchasing them. These kinds of stocks were first identified by Peter Lynch, which he talked about in his work, ‘One Up on Wall Street.’ In case you hear a stock associated with the term ten-bagger, it implies that it gives 10 times the returns of the initial investment.
The stocks of companies with tremendous growth potential can be identified by observing the growth in the company over the years and how it incorporates up to the minute research and technology to provide high-quality products and services. Several start-up companies exhibit the above-stated characteristics and investing in them at the right time can give you a head start in your investment. They may be stocks that are undervalued but have great fundamentals, making them easily purchasable at comparatively lower prices before their value escalates.
The companies which go on to become multibagger stocks would have an objective and goals to achieve, both short-term and long-term. In the section below, we will discuss more on how multibagger stocks can be identified well ahead of time.
Characteristics of Multibagger stocks - How to Identify them
1.Growth: You must look at the company’s growth in the past quarters and see whether the growth has been consistent throughout them. Stocks that have good cash flow, healthy multiples even if they are low, and are working at the operational level, they have great potential to become winning multibagger stocks.
2.Debt: The company’s debt level should not be higher than 30% of the equity value; however, this may vary from one industry to another. The debt-to-equity ratio of multibagger stocks is low and they have high earnings per share indicating the company’s sound financial status.
3.Technology: A company using novel technology with the potential for adaptability, usage, and application by the masses will gradually go on to make it big in the stock market. People like to follow trends, hence stocks that bring a twist in these trends will grab the attention of many investors. The stocks of big names like Apple, Microsoft have a similar story to tell.
4.Source of revenue: While earnings of a company do matter, so does the source of the company’s revenue. The growth prospects of the primary segments of the company and their probability to escalate into winning ideas and products in the future.
5.Interest of investor: Before investing in the stocks of a company, make sure that it has sufficient investor interest, both institutional and individual. This is a reassurance that the stock has caught the eyes of multiple bigger investors who plan out their investment in such potential multibagger stocks when they identify them.
6.Management: An efficient board of directors who are responsible for the management of the company’s operations and ensuring revenue maximization. In case of any adversity, they’ll make sure that the company suffers minimal losses and even the loss out by rolling out new policies.
Multibagger Penny Stocks
Penny stocks are the ones of small-cap companies that can be purchased at below Rs. 10 in India and $5 in the U.S. They are hard to spot and have low investments compared with other stocks that make their IPO debut, however, they would have solid fundamental performance.
Multibagger penny stocks are stocks whose price increases many folds compared with the time of one’s initial investment. Depending on the amount an investor initially and the current holding of the stock, the increase in its value can be considered as a bag. For instance, if an initial investment of Rs. 100 was made and its current value stands at 200, then it can be referred to as a two-bagger. As the value of the multibagger penny stock increases, the term changes as three-bagger, five-bagger, ten-bagger, and so on.
Risks involved with multibagger penny stocks
Rather than blindly investing in potential multibagger penny stocks, the investor needs to plan their budget and invest accordingly. The investor must do intensive research on the multibagger penny stocks before purchasing them to understand more fundamental information about the stocks, as they are not readily available. Since they are not liquid stocks, it would be harder to find a buyer for them and watch out for delisting of the stocks for non-compliance by the market regulator. The unpredictability involved in the investment as the prices of multibagger stocks keeps fluctuating as they are sensitive to market movements.
Thus, multibagger stocks may take time to grow into winning stocks on the stock market and give the desired returns, but with a little patience and proper research, an investor can make the most out of their investments.
1) What is meant by multibagger stock?
Multibagger stocks are the equity shares of a company that gives high returns on investment. These stocks may take time to give returns that are several times higher but if identified they are a great addition to one’s portfolio.
2) How do you choose multibagger stock?
Multibagger stocks can be chosen by doing intensive research on the company and its products to see whether the fundamentals of the company are strong and if its products are in line with the contemporary trends with a bright future.
3) How to identify multibagger stocks?
Multibagger stocks can be identified by looking at the company’s objectives, its P/E ratio, free cash flow, and institutional sponsorship in the company. Looking at these aspects of the stock will help you identify whether the stock is a multibagger stock or not.
4) Why do we call it - multibagger stocks?
It is referred to as multibagger stocks because they give returns that are several times higher than the investment and if an investor had invested Rs. 1000 in the stock and received returns of 2000, then the stock is a two-bagger. With further increases in value, the stock can be called three-bag, four-bag, and so on.
5) Why is there less risk with multibagger stocks?
Multibagger stocks are less risky as they are already established stocks that give high returns. It increases your financial stability when added to your portfolio. You have the backing of institutional investors as well to guide you in case of possible risks involved.
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