Have you ever heard on financial news that “These stocks turned to be the Multi-bagger for the investors’?
Multi-bagger! What do you understand with this term?
Worry less, because through this article on “What are the Multi-Bagger Stocks?”The learning will be the understanding of the definition of Multi-bagger stocks.
Why all the investors or traders get happy when they know that the stocks they owe turned into Multi-bagger stocks?
All the above questions have the solution in the further reading.
So, just calm down and open your mind to learn the basics of the Multi-bagger stocks.
Firstly, we will start with the definition,
What are the Multi-bagger Stocks?
The multi-bagger stocks state in short the equity shares of a company that generates a return multiple times higher than the associated cost of acquisition.
These stocks were firstly invented by the all-time great investor, Peter Lynch; from his published book is ‘One Up on Wall Street’.
Now, let’s check out what is the difference in Multi-bagger Shares?
Multi-bagger shares are issued by companies that are having tremendous growth potential, demonstrating sound management and production techniques.
It also states about the excellent research and development skills of a company, allowing the product to generate high demand in the market.
However, in some examples, you have seen that the Multi-bagger stocks 2019 had reflected an economic bubble for the development in a country as well, which might have adverse and various repercussions in the financial market of a country in the long term.
There is a great quote mentioned by Peter Lynch on Selecting the Stocks:
“Searching for companies is like looking for grubs under rocks: if you turn over 10 rocks you’ll likely find one grub; if you turn over 20 rocks you’ll find two.”
— Peter Lynch
Now, let’s walk through the discussion on how to pick stocks for multi-bagger.
How to Select the Multi-bagger Stocks?
These are essential for the stocks that have under-value pricing and have strong fundamentals, thus presenting themselves as a great investment option.
A stock that goes twice its price is called a two-bagger while if the price jumps ten times, it would be known as a 10-bagger.
Thus, multi-baggers are the stocks where the prices have raised most probably multiple times in their initial investment values.
In this, the Investors look to build the capital with decent risk appetite aim to get their hands on some multi-baggers stocks.
But the catch is- a multi-bagger is a multi-bagger only in savvy.
At the start, it may look like a risky undertaking in an over stimulated market environment.
We are referring to multi-baggers as stocks that multiply or provide revenues for phenomenal wealth creation.
The wealth creation or the income generation could happen from long-term multi-bagger stocks through compounding gradually and necessitates a patient investor’s mindset.
The reward for an investor from a multi-bagger bet is by putting serious capital at work.
However, the multi-bagger stocks are the stocks for buying where the investor has to understand a company’s business model, risks to growth, market potential thoroughly, and has invested at the correct entry valuations, willing to wait for a business to grow its earnings in the future years.
What are the Different Areas need to Understand for selecting Stocks?
- Advanced Research and Development of Various Companies
- The Size of the Company
- High Margin Business of the Company
- High Growth
- Should have Excellent Management Skills
- Future Growth Potential
- To know the various Return Ratios
- Competitive Advantage
- Mispriced Opportunities
What are the Risks associated with Multi-bagger Stocks?
All the Multi-bagger stocks in India are advised or recommended to be purchased in bulk for the wealth creation of an individual.
Therefore, the loss incurred by an individual would also be substantial in case he/she is caught in a market downturn.
Many investors that are purchasing the Multi-bagger shares can get caught up in an economic bubble or value trap.
All those companies that are trading at higher prices might be seen as a reflection of the creation of an asset bubble in the country, where all the products are being manufactured in high demand due to underlying market conditions.
In this type of scenario, it would lead to massive losses that will be incurred by the individual where the bubble arises and the asset value splashes.
Similarly, the value traps are a rising possibility when it comes to Multi-bagger stocks.
Products that are manufactured by a company might seem likely to have a profitable investment option in the initial stage but would lead to losses in the long term.
In this type, the investors expect the prices of these kinds of shares to rise tremendously in the future.
However, this kind of situation does not arise, as the asset does not have any intrinsic value.
Thus, investors need to carefully analyze the financial statements of a company and also the prevailing situation in the stock markets before investing in the Multi-bagger stocks.
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