What is Multibagger Stock?
Multi-baggers, as the name suggests, are the stocks that can generate multiple bags of money over the next few years. These are the stocks that have the potential to report explosive growth over a period of time.
Spotting multi-baggers is the process of identifying future midcaps/Large caps stocks from the present-day small caps stocks. They are the stocks that evolve gradually; they won’t give returns immediately when you invest in them. A structurally strong small-cap company with good management & future strategy will evolve to become a multi-bagger over a period of time.
How Multibagger Stock Work?
This can be explained by a story of a bamboo plant- you take a little seed, plant it, water it, and fertilize it for a whole year, and nothing happens. The second year you water it and fertilize it and nothing happens. The third year you water it and fertilize it and nothing happens. But in the fifth year, the bamboo tree sprouts and grows 100 feet in just six months. All these five years the bamboo tree makes its roots strong and gives it all what it needs to survive strong.
Lot of Misconceptions About Multibaggers
Many people have a lot of misconceptions about multibaggers. Many people think all stocks trading at their 52 week lows may turn around and become multibaggers. This is clearly wrong. Stocks trading at 52 week low can be due to many reasons. The decline in price maybe actually justified and stock might plummet further. Some people think all low priced stocks are potential multibaggers. But this is not true. Price of a stock on a standalone basis does not give any information about the future potential.
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Many people think all stocks trading at their 52 week lows may turn around and become multibaggers. This is clearly wrong. Stocks trading at 52 week low can be due to many reasons. The decline in price maybe actually justified and stock might plummet further.
To pick multi-bagger stock it is important to invest in strong business models and good management. Whether the business is good or bad is depended on many factors demographics, domestic consumption, infrastructure, interest sensitivity & export opportunities in the economy.
How these parameters contribute while stock picking is explained as follows
Demographics in the economy like the age, education & culture contributes to the success or failure of a business in an economy. Currently 65% of India’s population is between 15-64 years of age. We have the world’s second largest English speaking population and the world’s largest number of Engineers passing out per year. All these are providing a unique opportunity availability of cheap skilled labor and a huge demographic advantage.
Currently 65% of India’s population is between 15-64 years of age. We have the world’s second largest English speaking population and the world’s largest number of Engineers passing out per year. All these are providing a unique opportunity availability of cheap skilled labor and a huge demographic advantage.
Domestic consumption means the products and services that are bought & used in the country that produces them. This is related to the consumption of goods by the people in the economy where these goods are produced. With increasing disposable incomes, increase in quality of living and changing lifestyles consumer preferences is ever changing.
Infrastructure in a country is very important as an industry and also a major support for development of other industries. Example if a person named Raju wants to get educated he will require proper school/college to get his education further when he gets employed his company will be in any of the business parks which need to be constructed; Raju will also require proper roads, railways to commute to his office so there should be proper railway stations/roads build further he also requires a house where he can stay with his family which needs to be constructed. So who will construct all these schools/colleges, offices, houses, roads/railways etc this is where infrastructure industry becomes important.
In the 1990’s Infrastructure industry in India was at a very nascent stage and there was vast scope of for it to develop. So the investor who could have spotted the opportunity in the infrastructure sector in India in 90’s and who could have picked a structurally strong company like Larsen & Toubro would have benefited from the returns
Interest Rate Sensitivity: Once upon a time a person wanted to buy a car worth Rs 10,00,000. He decided to take a loan from the bank to buy this car. He went to his nearest bank to ask for the loan worth Rs 10,00,000 for a duration of 10 years. The bank told him the interest he will be charged on the loan amount will be 10%. He calculated the total interest amount and found it to be coming to Rs 5,85,808. Hence on a loan of Rs 10,00,000 he will have to pay Rs 15,85,808 to the bank. He found the amount to be too high and postponed his plans to buy the car.
When interest rates are low, the loans become cheap and the people start buying houses, consumer durables and automobiles thus increasing consumer spending. Also borrowers which are mostly huge corporations are motivated to expand their operations thereby increasing industrial activity which is a good sign
Export Opportunities: To gain over the competitors in exports, a country has to have pricing advantage over its competitors. Pricing advantage comes when there is cost advantage to other exporters without compromising on quality. India shows such advantage in the IT market and is one of the biggest IT services market in the world. The advantage comes from the pricing power which India has because of the low cost. For example 10 years ago IT companies in India used to give its new skilled joinee Rs 3,00,000.
Pricing advantage comes when there is cost advantage to other exporters without compromising on quality. India shows such advantage in the IT market and is one of the biggest IT services market in the world
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