A cyclical stock is a stock that’s price is affected by macroeconomic or systematic changes in the overall economy. Cyclical stocks are known for following the cycles of an economy through expansion, peak, recession, and recovery. Most cyclical stocks involve companies that sell consumer discretionary items that consumers buy more during a booming economy but spend less on during a recession.

What type of companies are included in cyclical stocks? –

Companies that have cyclical stocks include car manufacturers, airlines, furniture retailers, clothing stores, hotels, and restaurants. When the economy is doing well, people can afford to buy new cars, upgrade their homes, shop, and travel. While when the economy does poorly, these discretionary expenses are some of the first things consumers cut. If a recession is severe enough, cyclical stocks can become completely worthless, and companies may go out of business.

Cyclical stocks rise and fall with the economic cycle. This seeming predictability in the movement of these stocks’ prices leads some investors to attempt to time the market. They buy the shares at a low point in the business cycle and sell them at a high point.

A credit support annex (CSA) is a document that defines the terms for the provision of collateral by the parties in derivatives transactions. It is one of four parts of a standard contract or master agreement developed by the International Swaps and Derivatives Association (ISDA).

ISDA master agreements are required between any two parties trading derivative securities in a privately-negotiated or over-the-counter (OTC) agreement rather than through an established exchange. The majority of derivatives trading is done through private agreements.

The main purpose of a CSA is to define and record the collateral offered by both parties in a derivatives transaction in order to ensure that they can cover any losses. Derivatives trading carries high risks. A derivatives contract is an agreement to buy or sell a specific number of shares of a stock, a bond, an index, or any other asset at a specific date. The amount paid upfront is a fraction of the value of the underlying asset.

Why Collateral Is Required?

Because there is a high risk of losses on both sides, derivatives traders generally provide collateral as credit support for their trades. Each party sets aside collateral as a guarantee that it can meet any losses. Collateral, by definition, can be cash or any property of value that can be easily converted to cash. In derivatives, the most common forms of collateral are cash or securities. In derivatives trading, the collateral is monitored daily as a precaution. The CSA document defines the amount of the collateral and where it will be held.

ISDA is a trade organization created by the private negotiated derivatives market that represents participating parties. This association has been operating since 1985 which helps to improve the private negotiated derivatives market by identifying and reducing risks in the market.

ISDA has over 950 member institutions from 76 countries. These members comprise a broad range of derivatives market participants, including corporations, investment managers, government and supranational entities, insurance companies, energy and commodities firms, and international and regional banks.

ISDA was created to make the world of privately negotiated derivatives safer and more efficient. The ISDA identifies its three key work areas :

1. Reducing counterparty credit risk
2. Increasing transparency
3. Improving the operational infrastructure of the derivatives industry

The ISDA is responsible for creating and maintaining the ISDA Master Agreement that is used as a template for discussions between a dealer and the counterparty looking to enter a derivatives transaction. The ISDA Master Agreement was first published in 1992 and was updated in 2002. It provides an outline of all the areas for negotiation in a typical transaction. This includes events of default and termination events, how the agreement will be closed out if an event occurs, and even how tax consequences will be dealt with.

It is a phrase used to describe a bearish candlestick pattern that may predict the reversal of an uptrend. Candlestick charts show the day’s opening, high, low, and closing prices for a particular security. For stocks moving higher, the candlestick is white or green. When moving lower, they are black or red.

The black crow pattern consists of three consecutive long-bodied candlesticks that have opened within the real body of the previous candle and closed lower than the previous candle. Often, traders use this indicator in conjunction with other technical indicators like Relative Strength Index (RSI) or chart patterns as confirmation of a reversal. The opposite of Three Black Crows is Three White Soldiers which indicates a reversal of a downtrend.

The three black crows pattern occurs when bears overtake the bulls during three consecutive trading sessions. The pattern shows on the pricing charts as three bearish long-bodied candlesticks with short or no shadows or wicks. In a typical appearance of three black crows, the bulls will start the session with the price opening modestly higher than the previous close, but the price is pushed lower throughout the session. In the end, the price will close near the session low under pressure from the bears.

Volume can make the three black crows pattern more accurate. Volume during the uptrend leading up to the pattern is relatively low, while the three-day black crow pattern comes with relatively high volume during the sessions.

A Collateralized Debt Obligation (CDO) is a synthetic investment product that represents different loans bundled together and sold by the lender in the market. The holder of the collateralized debt obligation can, in theory, collect the borrowed amount from the original borrower at the end of the loan period. A collateralized debt obligation is a type of derivative security because its price (at least notionally) depends on the price of some other asset.

Advantages of Collateralized Debt Obligations

-Collateralized debt obligations allow banks to reduce the amount of risk they hold on their balance sheet. The majority of banks are required to hold a certain proportion of their assets in reserve. This incentivizes the securitization and sale of assets, as holding assets in reserves is costly for the banks.

-Collateralized debt obligations allow banks to transform a relatively illiquid security (a single bond or loan) into a relatively liquid security.

The “5 Cs of Credit” is a common phrase used to describe the five major factors used to determine a potential borrower’s creditworthiness. Financial institutions use credit ratings to quantify and decide whether an applicant is eligible for credit and to determine the interest rates and credit limits for existing borrowers. A credit report provides a comprehensive account of the borrower’s total debt, current balances, credit limits, and history of defaults and bankruptcies, if any.

The 5 Cs of Credit refer to Character, Capacity, Collateral, Capital, and Conditions.

Character– Character is the most comprehensive aspect of the evaluation of creditworthiness. The premise is that an individual’s track record of managing credit and making payments indicates their “character” as relevant to the lender, i.e., their propensity for repaying a loan on time. Past defaults imply negligence or irresponsibility, which are undesirable character traits.

Capacity– A borrower’s capacity to repay the loan is a necessary factor for determining the risk exposure for the lender. One’s income amount, history of employment, and current job stability indicate the ability to repay outstanding debt. For example, small business owners with unsteady cash flows may be considered “low capacity” borrowers.

Collateral– Collateral can help a borrower secure loans. It gives the lender the assurance that if the borrower defaults on the loan, the lender can get something back by repossessing the collateral. Often, the collateral is the object one is borrowing the money for: Auto loans, for instance, are secured by cars, and mortgages are secured by homes,

Capital- Lenders also consider any capital the borrower puts toward a potential investment. A large contribution by the borrower decreases the chance of default. Borrowers who can place a down payment on a home, for example, typically find it easier to receive a mortgage. Down payments indicate the borrower’s level of seriousness, which can make lenders more comfortable in extending credit.

Conditions– The conditions of the loan, such as its interest rate and amount of principal, influence the lender’s desire to finance the borrower. Conditions can refer to how a borrower intends to use the money. Consider a borrower who applies for a car loan or a home improvement loan. A lender may be more likely to approve those loans because of their specific purpose, rather than a signature loan, which could be used for anything. 

Meaning: A mortgage-backed security (MBS) is an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic payments similar to bond coupon payments. An MBS may also be called a mortgage-related security or a mortgage pass-through.

How a MBS Works?: The mortgage-backed security turns the bank into a middleman between the homebuyer and the investment industry. A bank can grant mortgages to its customers and then sell them on at a discount for inclusion in an MBS. The bank records the sale as a plus on its balance sheet and loses nothing if the homebuyer defaults sometime down the road. The investor who buys a mortgage-backed security is essentially lending money to home buyers. An MBS can be bought and sold through a broker.

What are the types of MBS?:

1- Pass-Throughs : The pass-through mortgage-backed security is the simplest MBS, structured as a trust, so that principal and interests payments are passed through to the investors. It comes with a specific maturity date of 15 or 30 years, but the average life may be less than the stated maturity age.

2- Collateralized Mortgage Obligations: CMOs consist of multiple pools of securities which are known as slices, or tranches. The tranches are given credit ratings which determine the rates that are returned to investors. The least risky tranches offer the lowest interest rates while the riskier tranches come with higher interest rates and, thus, are generally more preferred by investors.

Mortgage-backed securities played a central role in the financial crisis that began in 2007 and went on to wipe out trillions of dollars in wealth, bring down Lehman Brothers, and roil the world financial markets.

A minority interest is ownership or interest of less than 50% of an enterprise. The term can refer to either stock ownership or a partnership interest in a company. The minority interest of a company is held by an investor or another organization other than the parent company. A minority interest shows up as a noncurrent liability on the balance sheet of companies with a majority interest in a company.

Minority interests are the portion of a company or stock not held by the parent company, which has a majority interest. Most minority interests range between 20% and 30%.

While the majority stakeholder—in most cases, the parent company—has voting rights to set policy and procedures, the minority stakeholders generally have very little say or influence in the direction of the company. That’s why it’s also referred to as non-controlling interests (NCIs). In some cases, a minority may have some rights such as the ability to take part in sales. There are laws that also allow minority interest holders to certain audit rights. They also may be able to attend shareholder or partnership meetings.

Minority Interests can be of two types- Passive and Active

In passive minority interest, the controlling stake is usually below 20%. Under passive minority interest, a subsidiary company does not exert influence over the major company. On the other hand, the controlling stake of an active minority interest ranges between 21% to 49%, and a subsidiary, in this case, enjoys voting rights to influence the major company.

Initial Public Offering (IPO) can be defined as the process in which a private company or corporation can become public by selling a portion of its stake to the investors. An IPO is generally initiated to infuse the new equity capital to the firm, to facilitate easy trading of the existing assets, to raise capital for the future or to monetize the investments made by existing stakeholders.

The institutional investors, high net worth individuals (HNIs) and the public can access the details of the first sale of shares in the prospectus. The prospectus is a lengthy document that lists the details of the proposed offerings.

What is the procedure?

1- Selecting an investment bank: The first step is to select an investment bank as an underwriter. Here, the role of an investment bank is to help the company establish various details such as: 1- How much money the company hopes to raise. 2-The type of securities that will be offered. 3-The initial price per share For a large IPO, there can be multiple investment banks involved. In short, investment banks act as facilitators in the IPO process.

2-Creating the Red Herring prospectus: The next step of the IPO process is to create the ‘Red Herring Prospectus’. This is done with the help of underwriters. The prospectus includes various segments such as financial records, future plans for the company, potential risks in the market and expected share price range. Many times, underwriters go on road shows in order to attract potential institutional investors after they create the red herring prospectus.

3- SEBI approval: The prospectus is presented to the Securities and Exchange Board of India (SEBI). If SEBI is satisfied, it green-lights the initial public offering (IPO) process. In addition, it also gives a date and time for the IPO. But in case SEBI is not satisfied, it asks for changes to be made before the prospectus can be shared with public investors.

4- Stock exchange approval: Listing is the process where securities are allowed to deal on a recognized stock exchange. But for that to happen, the company needs to be approved by the exchange. For instance, the Bombay Stock Exchange (BSE) has a listing department whose purpose is to grant approval for securities of companies. The BSE has a list of criteria which needs to be followed for the company to be listed on its exchange.

For example: 1- The minimum issue size should be Rs 10 crore. 2-The minimum market capitalization of the company should be Rs 25 crore. 3- The minimum post issue paid-up capital of the company should be Rs 10 crore.

Only if the company follows these criteria, it gets an approval from the BSE.

5-Subscription of shares: Once all the formalities are done, the company makes the shares available to investors. This is done on the dates specified in the prospectus. Investors who wish to apply for shares have to fill out and submit the IPO application form.

6-Listing: The shares are allotted to different investors based on the demand and price quoted in their IPO application forms. Once this is done, investors get the shares credited to their demat account. In case of oversubscription (if the demand for shares is higher than the number of shares floated by the company), investors may not get the number of shares they originally wanted. They may get fewer shares after a lottery is done. Some investors may not even get any shares. In such cases, these investors get a refund of their money.

Some of the IPO’s that have came in the year 2020 are- CAMS IPO, Chemcon IPO, Route Mobile IPO, Rossari Biotech IPO, Happiest Mind Technologies IPO.