Finance

The Concept of Multibagger Stocks: How Can You Benefit From It?

Multibagger stocks are equity stocks that give returns of more than 100 percent. Companies with low debt to equity ratio and realizing high profits tend to generate multibagger shares. In addition to this, companies with considerable investment in Research and Development also have significant upside potential.

To invest in multibagger shares, it is important to have a Demat account. Start looking at ways on how to open a trading account before actual investment. Next, a good portfolio of multibagger stocks helps to generate manifold returns on investments. 

How to know if a stock is a multibagger?

There are a bunch of ways to identify a company that can generate multibagger shares. We will talk about a few points that will help you pick a potential multibagger stock.

  • Low or no debt Liability

Companies with low debt to equity ratio indicates good financial well-being. A company with a debt to equity ratio greater than 2 is less than ideal for investing, however there can be exceptions to this rule, based on the industry.

  • High profit

The net profit earned by a company should be considered before investing. Companies demonstrating high-profit generations tend to have sound financial management skills and the potential to grow multifold in the coming years.

  • PE ratio

PE ratio is the ratio of share price and earnings per share. It is not necessary that the stocks of a good company will have good returns. Stocks with high PE ratio can give only average returns due to low CAGR. A study of the PE ratio of the company is essential.

Characteristics of Multibagger Stocks

One important question that comes to our minds is what exactly is a Multibagger Stock. To define a multibagger stock, three parameters are considered. 

  • Multibagger number

A stock that is 10 times its initial cost price or has increased by at least 900 percent is a ten-bagger stock. 

Prior to investment, you must know how big the bagger is. 

  • The minimum time period of investment

A two-bagger stock requires a minimum of 3 years to double up. Plan your lock-in period before making the investment.

  • Expected Annualised Returns

This obvious question defines how big a multibagger is. Not all stocks give good returns on holding them for a long time. The growth trajectory of the company, and the sector to which it belongs give a clear picture of how strong it is. 

On similar lines, a two-bagger stock may be defined as the stock which doubles up in two years. If a stock doubles up in five years, it no longer remains as a two-bagger stock. Hence, the holding time is an important characteristic of a multibagger stock.

How to benefit from multibagger stocks?

The art of spotting multibagger stocks is the first and foremost step. The process of identifying the right stocks is difficult but rewarding.

Multibagger stocks in India should be purchased in bulk to maximise overall returns. 

To benefit from multibagger stocks, it is important to invest at the right time, at the right price and then hold it for a long time. It is important to hold the investment for the minimum required holding period to get maximum benefits.

No stock can give consistent increase in value. There will be sometime when the returns may turn negative. And there might be some years when the performance of the stock will be bullish. As a prudent investor, you must maintain your calm when the prices are falling and refrain from getting greedy when the prices are rising.

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