A stock split, on the other hand, refers to a process by which a company attains a larger number of shares in circulation in the market. For instance, the 2- for 1 stock split means that the corporation awards an additional share for every share a holder owns, and cuts the price of each share by two. As they say, multi-bagger stocks require the identification of companies that may have good growth, reasonable management, and a competitive edge in the market.
This action does not alter the market capitalization of the company but only increases the float and makes it easier for more investors to buy the stock.
Reasons behind stock splits
Firms tend to adopt stock splits when their stock price reaches a level that can be considered too high or even inaccessible to small investors. Attracting more people into the market can be another effect of a split because through dilution of the share price the stock looks more affordable. It also shows the management’s confidence in the company’s future since they believe that the stock will continue to perform well.
Impact on investors
From the investors’ standpoint, the stock split can be considered a positive occurrence. Despite not changing the real value of the securities owned, the higher number of shares can offer some psychological advantages. A lower price per share after a split can attract more investors and thereby increase the demand and volume of shares. Furthermore, the belief that the stock is cheaper triggers a positive trend of the stock price at times as well.
Identifying Multibagger Stocks
Multibagger stocks can be defined as stocks or shares in companies that offer several times their cost over several years. Such stocks are usually associated with solid fundamentals, unique and efficient business plans, and successful operational expansion. To find multi-bagger stock, some factors that should be considered are growth factors, adequate management, and competitive advantage in the relevant field.
Characteristics of Multibagger Stocks
Many multi-bagger stocks have similar characteristics. Typically, they are established in industries with high growth rates and large addressable markets. They typically feature high revenue growth, increasing profit margins, and effective capital management. Furthermore, multi-bagger stocks are usually supported by favourable macroeconomic signals, new products or services, and a model that can be scaled up over long periods.
Strategies for investing
The concept of investing in potential multi-bagger stocks needs to be managed properly for it to be successful. Financial statements should also be scrutinized as well as underlying business models and the position of the company about competing firms in the industry. The right investment horizon is in years because it takes time for the potential of these stocks to manifest itself. Periodic portfolio checks and diversifying into various industries can also be effective at risk management.
Balancing risk and reward
As we have seen earlier, both the stock splits and multi-bagger stocks have their pros and cons. While stock splits have positive effects when it comes to liquidity and marketability of the stock, they do not alter the operations of the firm. The performance of stock splits should not be the sole investment basis for the investors. On the other hand, while multi-bagger stocks are given a very high potential of giving good returns, they also involve greater fluctuation and risk. Investment strategies require a proper understanding of the various opportunities and risks which require a proper blend between research and diversification to earn higher returns and control for risks.
Conclusion
Using the theories of stock splits and the ability to find multibagger stocks can greatly help an investor improve their portfolio. A split in shares results in people being able to buy more thus leading to increased demand and therefore the price. On the other hand, Multibagger stocks refer to the ability to invest in stocks that would have high growth potential and would be held for a long time. When used in conjunction with careful research and prudent risk-taking, these approaches offer investors an excellent chance of earning high rates of return from the stock market. Services such as 5paisa can help in searching for such opportunities.
