Analysis of Stocks
A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. Units of stock are called “shares.” The person who purchases a stock (a shareholder) has bought a portion of the corporation and, depending on the type of shares held, may have a claim to a part of its assets and earnings.
In this article, we’ll be analyzing the popular stocks: – Blue chip, Multi-bagger, and Penny stocks.
Blue Chip Stocks
- Derived from the name of the colored chips used in poker, Blue Chip Stocks like the blue chips in poker with the maximum value represents stocks that are the most valued stocks of the stock market.
It is the stock of a company that has been operating successfully for several years and has a market capitalization in billions and the companies are the leader of their respective sectors. Since these companies are established and mature they tend to be the type of company that pays regular dividends that often increase from year to year. Thus, for investors who seek consistent and reliable dividends and don’t like risks, these stocks seem to be a perfect option.
Blue Chip companies are considered to be the best of best. For a stock to be considered as a blue-chip stock has to fulfill more than just one criterion. The criteria to be fulfilled are: – Large market share, Large and established company, Highly valued, Strong balance sheet, Strong financials, Pays good dividends, a Very popular brand, Good weightage index, Good amount of mutual fund investment.
Advantages - STABILITY: As the blue-chip stocks have stable earnings, therefore, they offer stable returns.
- GOOD DIVIDENDS: As the earning of the blue-chip stocks are more than the other companies of their respective sector thus, they have more money to pay dividends to their shareholders.
- GOOD MANAGEMENT: With time the company grows and so does the experience of management. Their experience and skill help the company in surviving the crests and troughs of the market.
- LESS RISKY: As all the above-stated reasons are favorable for good movement of stock, so the blue-chip stocks show good movement amidst the volatility of the stock market.
Examples: – Coca-Cola, TCS, Apple, Amazon, Reliance, etc.
Penny Stocks
Somewhat opposite of the blue-chip stocks, stocks that trade at a very low price and have a very small market capitalization, are said to be penny stocks. Generally, they trade below $5 and have a market capitalization of less than $300 million. They are associated with small and sometimes infant companies.
Since it is difficult to purchase or sell them; in this way they have a low exchange recurrence and because of this, they experience the ill effects of liquidity crunch and so are avoided by the traders, yet great penny stocks are on the radar of value investors. As the development in penny stocks is exceptionally eccentric, therefore a great variation in the bid-ask ratio is observed. These kinds of stocks can be very easily pumped and dumped because of their little market capitalization.
Also, as penny stocks belong to small companies and small companies have large growth potential. Subsequently, they likewise offer enormous development potential to their investors. Also, as they are of very small size, therefore in a market correction they bleed badly. Just like a paper flying during a storm. But, this goes in both the direction, i.e. during the Bull Run and bear fall, consequently adding greater risk to them.
These stocks have a variety of cons like lack of liquidity, very high risk associated with them, high probability of fraud, and inexperienced management.
Advantages:-
EASY ENTRY: You don’t need any special certification or degrees. All you need is a laptop, an internet connection, and a brokerage account.
HIGH POTENTIAL REWARDS: Massive profits can be earned from small invested capital. As the name itself suggests, they start small. Subsequently, they can make it big
Examples: – HFCL, Dish TV India Ltd., MMTC Ltd. Etc.
Multi-bagger Stocks
First used by Peter Lynch in his book ‘One up on Wall Street’, ‘Multi-bagger’ stocks are stocks that return several times their investment, that is, 100% better yields or more in a moderately brief timeframe. So for instance, on the off chance that stock gives you twice the profits, it is a two-bagger, assuming it gives you threefold the profit, a three-bagger, this and that forward. These stocks are undervalued with great fundamentals and high growth potential waiting to be discovered by the investors.
It is not at all easy to recognize a multi-bagger stock. One should track the market intensely and patiently and whenever a good bargain is found, one should thoroughly research it.
To discover multi-bagger stocks, look for companies that have the following features: – Strong brand image, moat, pricing power, and strong fundamentals.
Multi-bagger stocks are backed by businesses that grow consistently over some time, that have some remarkable attributes like strong financial performance, fair administration, productive capital allotment methodologies, and large free cash flows. In other words, multi-bagger stocks are not created overnight, you have to be patient with them and give them time to grow.
Popular examples: – Tesla, Netflix, Coca-Cola, Facebook.
Conclusion
Both blue-chip and penny stocks are opposites, which one is better depends on the requirement of the investor. Penny stocks price is very low and high volatility allows you to make more money in a short period but they are very risky. On the other hand, blue-chip stocks are highly-priced but are less volatile and risky. Which stock will become a multi-bagger, is a question that requires a lot of research and there are chances that even after this the forecasting done is wrong. Thus, Investors must always be careful when buying any kind of stock.
