Multibagger stocks are equity shares of a company that generate returns multiple times higher than its associated cost of acquisition. These stocks were first invented by Peter Lynch, published in his book ‘One Up on Wall Street’.
What are Multibagger Stocks?
Multibagger sharesare issued by companies having tremendous growth potential, demonstrating sound management and production techniques. It also exhibits excellent research and development skills of a company, allowing this product to generate high demand in the market.
However, in some instances,Multibagger stocksmight reflect an economic bubble developing in a country as well, which might have adverse repercussions in the financial market of a country in the long term.
What Characteristics Should a Company Possess to Generate Multibagger Shares?
Multibagger stocks are associated with manifold returns on investments. Such profits can only be realised if companies possess certain characteristics, such as:
Advanced Research and Development Skills
Robust growth of a company is associated with a massive volume of sales of its product in the market. To achieve this, quality products have to be delivered by such companies, providing immense customer satisfaction.
Considerable investment in research and development of a product has to be undertaken by companies to enlist its securities in the stock exchange asMultibagger stocks.
Start-up companies launching products having tremendous customer usage scope and no close substitutes are likely to generate massive demand in the market. These companies can increase their paid-up capital by issuingMultibagger stocks.
Companies acting as a monopoly or duopoly in the market can also be classified as issuer of Multibagger shares. Aggressive pricing strategies along with entry restrictions, can help companies increase their total revenue generation.
High Growth
You can easily identifyMultibagger stocks by looking at the performance of an issuing company. Businesses demonstrating high-profit generation and limited debt liability are top contenders.
Multibagger shares have high earnings per share as well, increasing your dividend income on the investment amount. These companies tend to have a low debt-to-equity ratio, indicating strong financial management skills. Price to earnings growth ratio (PEG) is also high, as the returns on one unit value of a share is several times of the primary investment.
Excellent Management Skills
Multibagger stocks are issued by companies having trained and experienced managers. With inefficient management, proper flow is not likely to be maintained in the production chain, as coordination between the production and sales chain would be faulty.
Several analysts are also employed by such companies to identify optimal pricing levels, to ensure revenue maximisation.
Why Should You Invest In Multibagger Stocks?
Multibagger stocksare known to increase your wealth manifold, as the returns on such investments are tremendous. For example, you can invest in such shares for Rs. 100, and realise profits amounting to Rs. 1000 (ten times the original amount – tenbagger stock).
However, investment inmultibagger shareshas to be kept in for a minimum amount of time, to ensure extensive capital gains through turnover of funds to final products sold in the market. Funds obtained from listing shares in stock exchange are used for both research and development and production of a product, thereby effectively realising high profits through massive sales volume.
What Is The Risk Associated With Multibagger Shares?
Multibagger stocks in Indiahave to be purchased in bulk for wealth creation of an individual. Therefore loss incurred by an individual would also be substantial in case he/she is caught in a market downturn.
Many investors purchasingMultibagger shares can get caught up in an economic bubble or value trap. Companies trading at high prices might reflect the creation of an asset bubble in the country, wherein the product being manufactured is in high demand due to underlying market conditions.
This would lead to massive losses incurred by an individual when the bubble pops and the asset value spirals.
Similarly, value traps are a rising possibility when it comes toMultibagger stocks.Products manufactured by a company might seem like a profitable investment option in the present but would lead to losses in the long term. Investors expect the prices of such shares to rise tremendously in the future. However, this situation does not arise, as the asset does not have any intrinsic value.
Thus, investors need to carefully analyse the financial statements of a company and the prevailing situation in stock markets before investing inMultibagger stocks.
What are Alternative Investment Options Available To An Individual?
Risk-averse individuals willing to participate in stock market investments can choose several other tools for their portfolio:
Debt funds
The corpus of these Mutual Funds primarily comprises debt securities issued by a company. Debt financing poses a liability for businesses and thus are repaid at first on revenue generation, thereby reducing associated risks.
Individuals having a low aptitude for risk can choose to invest in the various debt Mutual Funds registered with SEBI overMultibagger stock list in India. Portfolio managers of such funds also include different government securities and liquid money market instruments as well, to ensure maximum return realisation at minimum associated risks.
Hybrid Funds
Also known as balanced advantage funds, these hybrid funds aim to achieve optimal balance between risk and return. Both equity and debt securities are present in the portfolio of such funds.
Massive returns can be earned through equity stocks present in the corpus, while volatility of such funds due to market influences can be minimised through the debt-oriented securities present.
- Large-cap funds
Multibagger sharesare generally issued by companies just launching in the market, thus, increasing the risk level of investment. Large-cap funds, on the other hand, choose to invest in equity securities of companies having a market capitalisation of higher than Rs. 20,000 Crore.
These companies have a renowned reputation and proven financial strength, thereby reducing the chances of generating low returns. Large-cap companies have adequate financial resources to withstand any stock market downturn as well, thus ensuring the capital preservation of investors.
Multibagger stocks in Indiaare ideal for investors seeking to increase their wealth by a substantial amount through capital appreciation of respective securities. As these stocks have an incremental value multiple times the cost acquisition, capital gain profits earned are immense. However, investors should be prepared to assume associated risks as well.
