New investors have always been attracted to the stock market by the possibilities of high returns. That is why investors are lured in by stocks that offer profits multiple times their initial investment. These stocks are called multibagger stocks, and they can help you grow your wealth in a relatively short period. However, it takes a lot of effort to find shares with such enormous growth potential.
Read along to know more about investing in multibagger stocks.
Multibagger stocks are those that generate returns several times their initial cost of acquisition. These are undervalued stocks with a significantly high potential for growth, which makes them desirable investments. In an emerging market like India, these stocks can massively appreciate in value, resulting in ‘multibagger’ returns.
Peter Lynch first coined the term ‘multibagger stock’ in his book ‘One Up on Wall Street’. It only tells you about a share’s features and does not represent a separate category of shares. Stocks that double in price are called two-bagger or double-bagger stocks. Similarly, a stock that grows 10 times in size is a ten-bagger stock.
It is important to note that these stocks take a long time to deliver high returns. So, you need to be patient with these investments. Moreover, you will need a high risk appetite for investing in these stocks.
There are no fixed criteria that determine if a stock is a multibagger. You need to identify high-quality stocks that are likely to grow into a multibagger over time.
Here are some of the essential indicators of a multibagger stock:
Also Read: Stock Split: Why Companies Split Their Stocks?
The following are some of the reasons why you may want to invest in multibagger shares:
Before you invest in a multibagger stock, you should be aware of its risks. Some of these are discussed below:
Also Read: What Is Dividend Yield, How To Calculate It And Why Is It Important?
Multibagger stocks belong to companies with solid fundamentals whose intrinsic value has not been discovered by investors. If you have a high-risk appetite, you can invest in high-quality and affordable stocks that could grow into a multibagger. However, you may have to wait for a very long time to get substantial gains.
Ans: An undervalued company can take a very long time for the market to notice, requiring you to wait patiently. To hold the stocks for enough time, you will need to have the utmost conviction about their true worth.
Ans: The golden rule of investing is to avoid investing in anything you do not understand. However, if you have decided to invest in a high-risk stock, you will want to invest an amount that you can afford to lose and not a single rupee more.
Ans: The following are the various types of potential multibaggers:
Penny stocks: Typically trade at very low prices
Turnaround stocks: Belongs to companies facing adversities
Concept stocks: Stocks of companies likely to increase in value.
Ans: In a value trap, a stock may seem like a profitable venture. However, it leads to losses in the long term for investors as the asset does not have much intrinsic value.
Ans: Well-known brands like Axis Bank, Infosys, Titan and Motherson Sumi etc. are examples of shares that have given early investors 100x returns.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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