What are multibagger stocks and why you should consider investing in them

Investing in the stock market is very challenging, as you never know when volatility will hit. Investors have many options to invest in, such as multibagger stocks, penny stocks, midcap stocks, etc. Among these many options, multibagger stocks are considered a safer bet and have the potential to give good returns on investment.

However, identifying multibagger stocks requires a thorough knowledge of business fundamentals, sector trends, and management quality, etc.

What are multibagger stocks?

Multibagger stocks refer to those which provide returns that are multiples of the original investment. For instance, let’s say you buy a stock for $50 at market value. It can also be referred to as a multibagger stock if it rises to $700 in a comparatively short period of time.

Companies with strong growth potential and proven production and management capabilities issue multibagger stocks. It also demonstrates the company’s outstanding research and development competencies, which contributed to its product’s enormous popularity in the marketplace. But occasionally, multibagger stocks may also be a sign of an economic bubble emerging in a country, which might have negative long-term effects on the country’s financial system.

Read more: 10 most expensive stocks in the world by share price 2024

How to identify multibagger stocks?

Here are some points that you need to keep in mind when identifying multibagger stocks:

Strong and efficient management: Without an experienced and powerful management team, a firm cannot prosper. Every company that has been successful for many years needs excellent management. The strength can differ from person to person. You can examine a number of factors, including financial issues, share pledges, board independence, governance standards, and the diversion of cash to other companies or for personal use. This is for evaluating the management team’s strength.

Competitive advantage: One of the finest ways of identifying multibagger stocks is to know the competitive advantages of a company. As the firm grows, it may maintain its competitive edge by providing superior services and products. Therefore, it is important to evaluate whether the company is enhancing its offerings in response to consumer demand. Its competitive advantage comes from the company’s unwavering commitment to innovation and its ability to adjust and vary its offerings in response to market demands.

Strong promoter holding: Buying stock involves making investments in both the company and the individuals who founded it. There is no point in even evaluating a stock if the original founder has repeatedly defaulted and lacks a commitment to the company’s expansion. It goes without saying that a significant promoter stake is a crucial consideration when evaluating a name.

Healthy earnings growth: When a company generates money, a shareholder benefits. Looking at the earnings of a multibagger stock usually reveals high growth in the company’s earnings because of its strategies for capital allocation, profitability and sales growth.

High-margin businesses: To identify multibagger stocks, another easy approach is to look for companies with large profit margins. Multibaggers typically command large margins because they are in a dominant position in the sector or because there is little competition. Additionally, these companies often exhibit a stable margin over time, devoid of quarterly or annual fluctuations.

Sensible capital allocation: Companies that produce lots of goods typically use their own funds to grow or launch new goods. Additionally, such companies often have lower debt levels compared to equity. These companies typically provide free cash flow. It is calculated as operating cash flow less the cost of purchasing fixed assets. This cash flow will be utilised to pay dividends or fund expansions in the future.

Growth potential: Since the marketplaces are so dynamic, a company might not be able to make a profit if it doesn’t provide an extensive choice of goods or services. A multibagger stock has its management vocal about its goals, which is one of its traits and is capable of describing what needs to be done to accomplish the  goal.

Reasons to invest in multibagger stocks

Multibagger stocks have the potential to significantly boost an investor’s wealth due to their ability to generate exponential returns. These stocks are a good option for investors who can take on greater risk and are trying to build significant wealth. Multibagger stocks might not be beneficial for investors who desire consistent returns on their investment because these companies don’t always pay dividends.

Nonetheless, multibagger shares require a minimum amount of holding time to hold in order to guarantee large financial gains. The funds raised from the selling of shares on a stock market is used for product development as well as research and development, which successfully results in significant profits from large volume sales.

Risk factors of multibagger stocks

Before investing in potential multibagger stocks, investors should know the following associated risks:

Lower liquidity: Liquidity risks are frequently caused by a desire to earn quick money and by inaccurate or inadequate information. With companies whose price identification has not been determined by the markets, this is seldom the case.

Over reliance on stock tips: Despite the fact that investors should read reputable research reports before choosing stocks to buy, relying too much on these recommendations might be risky. Rather than relying solely on stock suggestions from unidentified sources when making an investing choice, it is recommended to conduct your own study.

Uncertainty: Of all the potential multibagger stocks that have been discovered, there are fewer opportunities for larger returns. Investors run the risk of losing their money. This is because it is unclear if markets will find the predicted price of the equities.

Certainly, investing in such stocks requires patience and an ability to withstand market fluctuations because it may take the company many years to become the industry leader.

Investment strategy for multibagger stocks

Here are some points that are useful when you plan a strategy to invest in multibagger stocks:

Research and analysis

Before making an investment in a multi-bagger stock, thorough research and evaluation are essential. It involves studying the management group, market trends, and the financial health of the business.

Diversification

To reduce risk, you must diversify your investment portfolio. Reducing the risk and raising the likelihood of earning notable returns can be achieved by investing in a variety of equities, including multi-bagger stocks.

Long-term investment

Since multi-bagger stocks require time to reach their full potential, investing in them is typically a long-term approach.

Risk management

To safeguard your investments, you must implement a risk management plan. Having an exit strategy is part of it in the event that the stock performs below expectations.

Bottom line

To ensure significant financial gains, multibagger stock investments should be kept for the shortest possible time. It is tempting to look for multibagger stocks, but investors should also set a limit on the percentage of their portfolio that they invest in these stocks. This is because in the event of a loss or inadequate gain, the investments do not negatively affect the portfolio as a whole.

Also, investors should register with a stock consulting business in order to get comprehensive investment guidance from professionals. This really helps them make an informed decision about investing in multibagger stocks.

Frequently Asked Questions (FAQs)

What are multibagger stocks?

Multibagger stocks are those equity shares that yield returns multiple times more than their respective cost of acquisition.

How to identify multibagger stocks?

By analysing business margins, allocation of capital and growth potential, you can identify multibagger stocks.

What should we check before buying stocks?     

Before buying stocks, investors must consider their investment time horizon, investment strategy, company fundamentals. They must consider the historical performance of the stock, company size, dividend history, among other factors.

Is investing in multibagger stocks risky?     

Yes, investing in multibagger stocks is risky. Hence an investor with a good risk appetite and high-risk tolerance should consider investing in it.