Stocks - are negotiable nominative securities that signify ownership of a part of a corporation’s equity capital. In other words, a share of stock is a part of a company. With one or more parts of a company, an investor becomes a partner of it.
Stocks can be:
- common, those that give their owner voting rights in the company’s general assemblies;
- or preferred, that offer preference in dividend distribution or capital reimbursement in the event of liquidation, without granting or restricting voting rights.
Public/Publicly-traded companies - a company is considered public when it has issued securities (stock, subscription bonuses, debentures, promissory notes, etc.).
The company issues stocks to raise funds for its growth. It pays no interest, but in compensation, it pays shareholders (partners) a full share of profits.
If, with a loan, the company has to pay interest, even if its operations had earned no profit, the company will have to disburse funds proportional to the profits generated.
Initial public offers need the authorization of the CVM (Securities and Exchange Commission), the Brazilian capital market regulatory agency. Public companies must meet several requirements defined by the Corporation Law and CVM regulations, in order to assure the reliability of information and financial statements released.
Stock Market - is the place where companies’ shares are purchased and sold. Stock markets are the most important stock negotiation centers for stock trading, due to the significant volume and greater transparency of the transactions made. The BM&FBovespa is the only stock negotiation center for stock trading in Brazil.
Brokerage companies - are financial institutions that are members of the stock market, accredited by the Banco Central, the CVM, and the stock markets themselves, and are able to trade securities with exclusivity on the BM&FBovespa, among other activities in the financial and capital markets.
A stock broker is the institution that buys and sells stocks for investors.
How much does a stock cost?
How much does a stock cost? The stock price, or rather, its sales and purchase price is determined by the market, varying mainly due to the company`s actual or expected financial performance, as well as the domestic and international economic scenario.
Stocks are called variable income securities because both the earnings distributed to shareholders - dividends and bonuses - and their own value is not previously fixed. Therefore, the fair price is the one determined between the buyer and seller.
What is the minimum value to invest in stocks?
What is the minimum value to invest in stocks? There is no required minimum value to invest in the stock market. This varies depending on the price of the stocks one wishes to buy, and even the choice of broker.
How to choose stocks
How to choose stocks - investors must be aware of the characteristics and the performance of the company whose stock they are thinking of buying.
Stocks can be divided into:
- blue chips or 1st line - stocks with high liquidity (a large amount of trades) and highly desired by investors in the stock market, usually those of large traditional, nationwide companies with excellent reputations;
- 2nd line - stocks with a little less liquidity, of good quality companies, usually large or medium in size;
- 3rd line - stocks with low liquidity, usually of medium and small size companies (but not necessarily of lower quality), that are not as frequently traded;
- privatization - stocks from companies placed in the market through auctions of Brazil`s National Privatization Program - PND. Some companies in the process of privatization may already have their stocks traded in the stock market even before the process is completed, tending to increase their liquidity once the process is finished.
Order - when the investor places his/her order with a brokerage company with which he/she is registered, the company must execute it promptly, at the best available price, as long as it is a liquid stock - this is a market order.
This is the most common order, but there are several other types.
The investor can, for instance, set a specific price or best value for its execution - this is a limited order, or only indicate the number of shares, giving the broker an administrative order that it will execute at its criteria.
In order to limit losses, an investor may place an order setting a limit price, which, if reached during the quotation process, becomes a market order - this is a stop-loss order.
There is also the possibility to link the execution of an operation to the execution of another previously defined and opposed order (purchase versus sale), in the same or different markets - this is the/a married put and stock order, which is only effective if both orders are executed.
Similarly, there is the financing order, in which the investor decides to take opposite positions, also in the same or different markets, but with a distinct expiration deadline.
Investors can also establish an expiration date for their orders through an order valid for the day or an order valid for a specific term. Once the term is expired, the order is canceled. There is also an order valid for an undetermined time, during which remains valid until executed or cancelled.
Discretionary order - for which conditions are established for its execution aggregated together with others, made later identifying owners, lots, and prices.
How the trading floor works
How the trading floor works - the electronic trading session is the system where orders are placed electronically by the brokers’ desk operators through terminals connected to the stock exchange or through their Home Broker systems that channel online orders. All these orders are sent to a central server that closes the deals and informs the brokers. All stocks are traded though electronic trading sessions.
Usually refer to the Brasília time zone -3h GMT
from 9.45 am to 10.00 am
Daylight Saving Time*
from 10.45 am to 11.00 am
Regular Trading Session
from 10.00 am to 5.00 pm
Daylight Saving Time*
from 11.00 am to 6.00 pm
Pre-opening After Market
from 5.30 pm to 5.45 pm
Daylight Saving Time*
from 6.30 pm to 6.45 pm
from 5.45 pm to 7.00 pm
Daylight Saving Time*
from 6.45 pm to 7.30 pm
from 10.00 am to 5.00 pm
Daylight Saving Time*
from 11.00 am to 6.00 pm
How an auction works
How an auction works - bids are stock market operational processes (the Bovespa part) of the BM&FBovespa with the objective of protecting the market against manipulation and/or sudden price variations.
Every time a market parameter pre-established by the BM&FBovespa is reached, a bid will be generated, immediately informing the market. All investors can participate in the bids.
During the bids, no deals are closed, only new offers are placed. At closing time, if there is no extension, the deals corresponding to the best offers at the sales and purchase ends will be closed, at the equilibrium price.
According to CVM no. 168, there are some parameters that automatically generate stocks bids on the BM&FBovespa:
QUANTITY PARAMETERS RELATED TO THE AVERAGE TRADED IN THE LAST 30 TRADING SESSIONS
For quantities between 5 and 10 times the average traded
A 5-minute bid term
For quantities above 10 times the average traded
A 1-hour bid term
Procedure for average quantity fitting
Once a bid is announced that has reached the quantity parameter referenced above , the announced quantity will become the new average quantity valid for the day, and the trades with quantities lower or equal to the announced bid will undergo a new bid with a term reduced to 5 (five) minutes. For a new operation to be analyzed following this procedure, on the same day, the following must be respected:
a) The principals involved in this new operation must be different from those of the previous bid, or, if they are the same, the operation must not surpass any other parameter defined by Instruction CVM 168; and
b) Such procedure shall not be applied in operations that reach quantity standards related to the equity capital mentioned below or for direct trading.
For quantities between 0.5% and 0.99% of the common stock
A 5-minute bid term
For quantities between 1% and 2.99% of the common stock
A 1-hour bid term
For quantities between 3% and 6% of the common stock
A 24-hour bid term
For quantities above 6% of the common stock
A 48-hour bid term
For quantities between 1% and 2.99% of the preferred stock
A 15-minute bid term
For quantities between 3% and 4.99% of the preferred stock
A 1-hour bid term
For quantities between 5% and 20% of the preferred stock
A 24-hour bid term
For quantities above 20% of the preferred stock
A 48-hour bid term
a) For operations with subscription rights, equity capital criteria and traded averages equal to the referenced stock apply;
b) For operations with subscription bonuses or receipts, the applicable percentages for fitting the operations related to the equity capital and the traded average are calculated in relation to the quantity of the respective issue;
c) For operations with investment certificates, investment fund quotas, and stock certificates of deposit, the same criteria adopted for stocks apply; and
d) For operations with Units, the percentages applicable for fitting the operations related to the equity capital will be calculated in relation to the types of stocks that make up the Unit, adopting the most restrictive value in case of mixed composition of common and preferred stock.
FLUCTUATION PARÂMETERS IN RELATION TO THE QUOTATION
Fluctuation of 3% to 8.99% of the last price of the stocks included in the stock market index portfolio.
A 5-minute bid term
Positive or negative variation of at least 9% of the last price of the stocks included in the stock market index portfolio.
A 15-minute bid term
Other stocks with positive or negative fluctuation of 10% to 19.99% of the last price.
A 5-minute bid term
Other stocks with positive or negative fluctuation of 20% to 49.99% of the last price.
A 15-minute bid term
Other stocks with positive fluctuation of 50% to 99.99% of the last price.
A 30-minute bid term
Other stocks with fluctuation higher than 100% of the last price.
A 1-hour bid term
Other stocks with negative fluctuation higher than 50% of the last price.
A 1-hour bid term
Positive or negative fluctuation of at least 15% of the base-price established by the stock market.
A 1 to 15-minute bid term
Exclusively for stocks that are not part of the stock market index portfolio and which have a closing price equal to or higher than R$ 100.00, the trading price limit, negative or positive, is 3% of the last price.
Each asset’s base-price will be defined as follows:
- At the beginning of the day and before the asset is traded, the asset’s base-price will be the previous day’s closing price and this will be the price used to establish the asset’s intraday limits;
- After the first trade of the day, the base-price will be updated to this value and it will be the price used to establish the asset’s intraday limits; and
- Throughout the day, the asset’s base-price will be changed every time there is a bid activated by the intraday limit control, consequently assuming the price that results from the bid.
The BM&FBOVESPA’s Operations Director may establish other criteria to define the base-price of one or more assets if required by market conditions.
Stocks not traded in the last five sessions
A 15-minute bid term
Stocks trading for the first time
A 15-minute bid term
The financing operations fitting the parameters that require a BDS will undergo 1-hour bids, except in cases in which the operation’s financial volume referring to the financing position does not go exceed R$ 10,000,000.00, in which case the operation will undergo a 30-minute bid.
During a bid, if its price reaches the limit of 100% above the initial price or 50% below this price, trading will be extended for 15 minutes to communicate the new price to the market, as long as this interruption occurs within trading sessions working hours. This interruption will occur only once and it will not be applied for bids with 24 or 48-hour previous communication (BDS).
In case an operation must undergo bid due to more than one criterion (price or quantity), the criterion that requires more communication time should be adopted.
Regardless the criteria above, the Trading Session Director may determine that an operation must undergo a bid, when, in his/her judgment, the lot size to be traded exceeds the quantity considered normal or to assure price continuity.
Special bid cases
a) When a significant fact or news is released about earnings for a traded asset, the stock market may place the asset’s respective negotiation in a bid for a term to be determined by the Trading Session Director, in order to maintain good price continuity.
b) Trades closed by the closing of a bid in which one or more brokerage companies have incurred losses due to technical problems, corroborated by the specific department of the stock market;
c) In cases in which one or more brokerage companies indicate technical problems before a bid is closed, the closing time will be suspended and, once the problem is solved, if the original closing time has been exceeded, a new 5-minute term will be allowed.
d) For assets showing high price volatility, the stock market may adopt a 1-hour bid procedure for the first asset trade (opening price) and new bids during the regular trading hours, if the proposed trading price is different from the last one practiced. Such procedures are covered in article 8 of Instruction CVM 168 which establishes that special procedures are “those that aim to offer proper conditions for fair participation by investors in the operations conducted by the stock market.”
Bidding dynamics - once a bid is announced, investors can send purchase and sale offers normally, up to its closing time.
According to BM&FBovespa rules, there are no apparent lots in the bid. However, investors will have their orders placed in the bid if they are at least equal to or higher than the theoretical bid price, in case of purchase order, or if the order is at least equal to or lower than the theoretical price in the case of a sales order.
In case there is an apportionment for offers of the same price, the offers will be determined by price order and chronological registration sequence.
Offers taking part in a bid cannot be canceled. Other offers can be canceled normally, at any time.
Bid terms are defined according to the trading parameter reached. Bid closing times in the electronic system may undergo automatic extensions according to the following criteria:
- Theoretical price change
- Theoretical quantity change
- Recording of a new offer that changes the quantity provided for a previously registered offer
- Unmet balance change
Bids extended beyond the trading session will have continuity and closure, regardless of the end of trading in the electronic system. It is quite common that more liquid stocks have bids extended for an additional 5, 10 or even 15 minutes after the regular session is over.
During this time, order inclusion is allowed, as long as they participate directly in the bid. Orders for stocks that are in bids that cannot be executed after the regular session is over will be sent when the After Market opens. If their offers are covered by better ones, keeping them out of the bid, the client may cancel the order and insert a new one.
Bids may have consecutive extensions according to the conditions described above, until no further changes cause new extensions.
At the end of the bid, the asset will be traded at a single price, the so-called equilibrium price, which is the price at which the largest number of offers is met.
Frozen assets - Every time a negotiation trading parameter is reached, the asset goes through another state of trading before going to bid: freezing. Assets remain frozen until the session`s director indicates the beginning of the bid, which may not happen, depending on his/her evaluation.
During the period when the asset is frozen, it is not possible to insert new offers, or even make cancellations. While an asset is frozen, offers or cancellations sent will be rejected by the BM&FBovespa electronic trading system.
Offers that cause stocks freezing will not be presented by the quotation update tools until the bid starts or the asset is unfrozen.
Pre-Opening - is the processes started before the opening of trading, where trades are not closed, only new offers or cancellations are placed. The procedure is valid for all assets traded on the BM&FBovespa stock market.
Pre-opening has a format similar to that of the bid, but it is not one. During pre-opening, an opening price may be set (in the same way as the equilibrium price) and the theoretical quantity.
After the pre-opening closure, the first trades of the day are executed at the opening price. For the assets in which there is price formation, when there is a change in the price and theoretical quantity within the two minutes that precede the pre-opening closure, a bid will be automatically generated.
Closing call - is the process that occurs during the five last minutes of the trading session, where all stocks that make up the Ibovespa index automatically enter the bid process.
The closing call is closed when the regular trading session is over, when the last trades of the day are executed at the closing price. If the closing theoretical quantity and price are changed within the two minutes before the regular trading session closes, bids are extended according to the procedures presented above.
Other Bids - there are other types of bids made in the stock market. Stock Buybacks(buyback bids of stocks being traded in the market, by the controller), Subscription Remainders Bids (bids for the stock not subscribed by the company`s shareholders, who have preference), and also Special Sales Bids (large lot sales) follow specific procedures and depend on the publication of the respective BDSs, featuring all the information regarding the operations.
Investors - persons or institutions that invest funds in the stock market through brokerage houses and securities dealers, which execute their orders and are paid commissions for their services. Investors are the brokers’ clients.
Investor risks - investments are subject to the inherent uncertainties of the financial market. Economic data and the decisions made by market participants result from the intervention of several factors and, consequently, it is very difficult to “predict the market”. Financial products can be separated into the following classes:
Fixed Income: debt instruments issued by governments, cities, and private companies. The investor who invests in fixed income assets is lending money to the security issuer. Their prices typically show low volatility. Consequently, conservative investors tend to prefer fixed income investments. For this class of assets, one important analysis relates to the possibility that the issuer, that is, the one who took the loan, may not honor his/her payments (see credit risk below).
Examples: National Treasury Bills, CDBs, debentures.
Variable Income: refers to the market in which stocks are traded. A stock is a fraction of a company`s capital. Therefore, the investor who buys it, acquires part of the issuing company`s property. In general, variable income instruments present more risks than fixed income instruments: stocks vary more and require more tolerance for losses.
Examples: VALE5, PETR4, BBDC4.
Derivatives: are instruments whose prices vary according to other underlying assets. Therefore, a dollar derivative depends on the behavior of the American currency. Derivatives are more sophisticated investment instruments. They allow for complex investment structures. They are aimed at more experienced investors who are familiar with their dynamics. Derivatives usually present loss potential significantly higher than fixed income assets and stocks.
Examples: Futures (dollar futures, livestock futures), options (dollar purchase options, PETR4 sales options), swaps.
Hence, the investor must dedicate special attention to this kind of investment. Options operations are especially volatile and, when the investor is sold in options, his/her losses are theoretically unlimited.
In that sense, it is key to constantly observe the guarantee allocations required by the stock market so that the coverage for potential losses is always sufficient.
For further information, we recommend the stock market's website
When choosing one of the products introduced above, investors should know which risks they are taking. Here is a summary of the main kinds of investor risks:
Credit Risk: nonpayment on the part of borrowers (such as the payment of loan interest or principal). This is the kind of risk most important to fixed income investors. When buying securities, investors need to know the borrower`s quality and make sure the investment return compensates for the risk of nonpayment (or default, in market terminology).
Market Risk: relates to the price fluctuations of assets. The daily price fluctuation of a stock, a government bond, or an exchange rate (which is nothing more than the price of a foreign currency) exposes an investor to undesired results. Market risks are important for derivatives and variable income instruments, which daily variability can be significant.
Liquidity Risk: this corresponds to an investor`s difficulty in liquidating a position. If it is necessary to sell an asset, will someone buy it for a fair price?
The Argentinean government`s decision to not honor their commitments of public debt bonds in the beginning of the decade exemplifies the credit risk of investments in fixed income assets.
During the 2008-2009 crisis, some securities had significant losses of up to 80% in single day. These losses are the materialization of the market risk in the stock market.
Also with regard to the 2008-2009 crisis: the wave of bankruptcies witnessed from mid-2008 was mostly leveraged by the excessive use of derivative instruments, which undermined the balance sheets of financial institutions worldwide.
CVM - Brazilian Securities and Exchange Comission
CVM - or the Securities and Exchange Commission, works to:
- ensure the efficient and regular work of the stock and over-the-counter markets;
- protect the holders of securities against irregular issuances and illegal acts by administrators and controlling shareholders or security portfolio administrators;
- avoid or restrain types of fraud or manipulations aimed at creating conditions of artificial demand, offers or prices of securities traded in the market;
- ensure public access to information on traded securities values and issuing companies;
- ensure equitable commercial practices in the securities market;
- foster savings and their investment in securities;
- promote the expansion and efficient operation of the stock market and foster regular investment in the equity capital stock of publicly-traded companies;
Among other responsibilities, the CVM is supposed to regulate in the following areas:
- the registration of public companies;
- the registration of securities distribution;
- accredit independent auditors and security portfolio administrators;
- organization, functioning and operation of the stock markets;
- trading and intermediation in the securities market;
- portfolio administration and securities custody;
- suspension or cancellation of registrations, accreditations, or authorizations;
- suspension of issuance, distribution, or negotiation/trading of specific securities or declare a recess of the stock market.
Market indexes and indicators
Market indexes and indicators - the BM&FBovespa collects, organizes and discloses a variety of information about the trades made in each session. The main indicators refer to the prices and volume of the stocks traded, that translates into market liquidity. It also prepares indexes showing the behavior of the market as a whole or of specific segments.
The Bovespa Index (Ibovespa) is the most important indicator of the Brazilian stock market performance, since it depicts the behavior of the main stocks traded on the BM&FBovespa.
It is made based on an imaginary investment, in reals, of a theoretical stock quantity (portfolio). Its basic aim is to serve as an average indicator of the market’s behavior. In order to do so, the stocks that are part of the index represent more than 80% of the number of trades and of the financial amount traded in the spot market.
Ibovespa is an indispensable tool for those who invest in stocks, either to follow the market or to comparatively evaluate your own portfolio performance.
BM&FBovespa also discloses the:
Brazil Index (IBrX) - measures the return of a stock portfolio made with the one hundred most traded stocks;
IBrX-50 - measures the return of a stock portfolio made with the fifty most traded stocks;
Electric Power Index (IEE) - a sectoral index that measures the performance of the electrical power sector;
Telecom Sectoral Index (ITEL) - measures the performance of the telecom sector stocks (both land and mobile phones);
Differentiated Corporate Governance Stock Index (IGC) - evaluates the performance of a theoretical portfolio composed of stocks of companies that show good levels of corporate governance;
Bovespa Value Index (IVBX-2) - registers the return of a hypothetical portfolio made exclusively with stocks issued by companies highly regarded by investors, ranked from the 11th position, both in terms of market value and stock liquidity.
Liquidation - is the financial liquidation of stock market operations, that is, the sales credit, the purchase debits, the brokerage fee charged, and the fees charged by BM&FBovespa. Liquidation is effective on the third business day subsequent to the closing of trades. It is customary to say that liquidation takes place on D+3.
Liquidation risks - the Brazilian Clearing and Depositary Corporation (CBLC) is the clearing body responsible for the compensation and liquidation of the operations conducted in the BM&FBovespa spot market.
In the case of a sales operation in the spot market, traded stocks should be available in the seller’s custody account for delivery to the buyer within the term set in the Table of Terms and Timetables of the CBLC Liquidation Cycle, that is, by 9.59 am of the third business day after the operation is realized (D+3).
Total or partial nondelivery of traded stocks within D+3 or nonpresentation of the documents necessary for liquidation are considered nondelivery of assets and result in a fine to the stock seller.
If assets are not delivered by 10.00 am of D+4 of the operation, the CBLC starts, on the same day, the process for dealing with nondelivery – the Asset Repurchase Process – in addition to charging a new fine on the value of non-regularized assets.
The repurchase order issued on D+4 is the instrument that authorizes the counterpart to execute, at the market price, a new operation to purchase the assets acquired on D+0 and not received within the regulated term due to nondelivery.
This repurchase order should be executed within D+6 and have its execution confirmed to the CBLC within D+7. The seller at fault for nondelivery of the assets shall pay the repurchase price difference, if there is one.
If the repurchase is not executed by the established deadline for whatever reason, CBLC, on D+8, will revert the operation, returning the financial value to the buyer of the operation.
Thus, the client should be aware that any sale made without having the stock in his/her account, or with the expectation that it would be received as a result of a purchase of the same asset made on a previous date, may result in his/her delinquency, with the consequent penalties, as shown, if there are problems with liquidation of the purchase.
Custody - for the safekeeping of securities and exercise of rights, investors may take advantage of specialized services provided by institutions accredited by the CVM.
Custody is fungible when the deposited securities can be replaced, at withdrawal, by others that are the same (same kind, quality and quantity). When the values are kept detailed by the depositor, custody is not fungible.
The CBLC - Brazilian Clearing and Depositary Corporation, an associated company that provides this kind of service to BM&FBovespa, offers custody at international quality standards, having obtained ISO 9002 certification. CBLC offers fungible custody service with online and real time movement of custody account assets. In addition, it adopts the ISIN security code used worldwide.
CBLC - Brazilian Clearing and Depositary Corporation
CBLC - Brazilian Clearing and Depositary Corporation was created in 1997 as a spin-off of the BM&FBovespa. The creation of CBLC was an answer to the Brazilian market need to establish a modern clearing and depositary structure.
CBLC is a for-profit company belonging to the participants of the Brazilian market;
It is the only Asset Central Depositary for the stock market, offering the same services for the private fixed income securities market;
It is the only Central Counterpart (CCP) for the stock, stock derivatives and private fixed income securities markets;
It has a solid risk management and several protection mechanisms to deal with payment or delivery failures;
It has a safe depositary structure and a segregated account structure that guarantees the protection for final investor assets;
It ensures that a broad range of participants have access to its services, allowing their investment in specific securities, according to their vocations and business strategies;
All participation criteria are public and clearly defined, ensuring that market participants have the same access conditions;
All relevant information, statutes, regulations, standards, laws and operational procedures are fully disclosed, in order to promote an environment of transparency and efficiency for the capital market;
It has a contingency plan that provides investors maximum protection and the integrity of their investments;
It acts in accordance with the main international recommendations for risk management, liquidation, compensation and custody systems.
Primary and secondary markets
The primary market encompasses the launch of new stocks in the market, providing new funds for companies. Once the initial market launch occurs, stocks are negotiated in the secondary market, which encompasses the over-the-counter markets, organized or not, and the stock market.
Operations like the initial placement, to the public, of a large stock lot held by a single shareholder may characterize initial public offer operations, requiring CVM registration. Despite the similarity with the primary market, the resources captured go to the selling shareholder (not to the company), making it, therefore, a distribution in the secondary market.
Odd lot market
odd lot market - all companies have their stocks traded in lots, than can be of 1, 10, 100 shares, etc. If, for example, the investor does not wish to buy a standard 100-share lot, but 150 shares, he/she needs to use the odd lot market. In this case the standard lot, the 100 shares, will be traded in the whole lot market, and the remaining 50, in the odd lot market.
Subscription - is the process of issuing new stock promoted by a particular company. Subscriptions are usually closed, assuring to the current shareholders preference in subscription. Stock subscription is optional, meaning that the shareholder can choose whether to participate.
Subscription rights are securities tradable in the stock market for a specific period of time that assures the holder the possibility of maintaining his/her participation in the company, through the purchase of more shares at a stipulated price. Most of the time the price that is paid is lower than the market price in order to make fund-raising viable for the company. Some investors subscribe the stocks, other sell their subscription rights to other investors interested in subscribing the stocks.
However, like options, after a pre-established period ends, the rights must be executed or their value is lost. In order to identify them it is necessary to pay attention to the trading codes.
Subscription right codes follow a specific logic:
- subscription rights for ON stocks are identified by code 1. E.g.: Chapecó ON rights - CHAP1;
- subscription rights for PN stocks are identified by code 2. E.g.: Chapecó PN rights - CHAP2;
- subscription rights for PNB and PNC stocks are identified by codes 12 and 13, respectively. If there are more classes of stocks, the sequence continues starting with number 14. E.g.: Sibra PNC rights - SIBR13;
These rights have much higher risks than stocks, since they are traded at values lower than the asset market price. In practice, trading rights is very similar to the options market, which, however, has its own regulation and access restrictions.
We recommend that subscription rights be only purchased if resources are availability and one has the intention to subscribe the respective stocks.
Options market - sales or purchase rights of an asset with established prices and terms are traded and investors commit to conducting an operation at a future time. This brings the risk of an operation not taking place, or the prices of the asset going in the directions opposite to what the investor was expecting.
Therefore, there is no guarantee of profitability.
In addition, one must consider that there is a possibility that the option buyer may lose all the capital invested; and an option seller must have the financial capability to cover potential losses, as well as have guarantees to meet margin requirements.
The holder`s (buyer’s) purchase option risk - is limited to the amount paid by the options (the premium). However, the investor needs to be aware that he/she could lose his/her entire investment if the behavior of the cash price, after the options are acquired and up to their expiration, is not favorable to his/her position (options are valid only for a specific period, after which they expire).
In case of purchase options, if the owner continues to hold the option up to expiration and, on this date, the stock cash price is lower than the strike price, he/she will not exercise it (there would be no advantage in buying stock for a price higher than the market price), nor would he/she be able to transfer it to another investor. In the market jargon, the option will have “turned into dust” and the investor will have lost the full amount spent to acquire it.
Short selling risk (purchase option launch) - the launch of short selling options, that means, receiving an amount in cash (the premium) to assume the commitment to sell stock an investor does not have, is a strategy that involves a high degree of risk.
This options holder (the investor who paid a premium for the launcher to assume the commitment) will only exercise it if it is interesting for him/her, that means, if the stock`s cash price is higher than the option`s exercise price. For the launcher, that means he/she will have to purchase the stock in the spot market to deliver at the exercise price.
Anytime the difference between the spot and the exercise price is higher than the premium received, the launcher will have incurred a loss, which will increase if the spot price rises.
Another aspect to be considered in this strategy is that, as long as he/she holds the position, the uncovered launcher will have to deposit guarantees to cover the potential losses of the operation, whose value calculated daily.
Options expiration date - it is important that the investor who purchased an option (the holder) be aware that his/her right to exercise it is valid only during its validity period. After the expiration date, the option expires, completely losing its validity.
Another important point to highlight is that on the BM&FBovespa, the exercise of the option is not automatic, it must be requested by the option holder. This means that, even in cases in which the exercise is clearly advantageous to the holder, it will only take place if requested by the investor. The investor can make the exercise request to the broker.
In the case where a holder, under these conditions, does not request the exercise, the option will expire and the investor, in addition to not having taken advantage of an advantageous situation, will also lose the full premium paid to acquire the option.
Identifying Option Trading Codes - stocks and options have different trading codes. Although options trading requires filling out and sending specific documentation, it is important for the investor to know the differences in identification of stocks and options in order to avoid misunderstandings.
In the BM&FBovespa trading system options series are identified according to the following code structures:
In the list of authorized series (available on the BM&FBovespa website),
AAAA - Company's alpha code
A - Indicator of the type (purchase or sale) and expiration month
NN - Option numeric indicator
".." OR E - Blank field style indicator = American options E = European options
Alphabetic code table for differentiating sales and purchase options and expiration month:
Futures market - are stock purchase or sales contracts, at prices agreed to by the parties, for liquidation at a specific future date, previously authorized. Usually, it is expected that the price of the futures contract of a certain stock will be equivalent to the strike price, increased by a part corresponding to the interest rate expectation between the time of the stock futures contract trade and the respective contract liquidation date.
As in any derivatives market, futures market investments are also subject to risks. Investors should consider, in their investment analysis, the issuing company`s economic-financial status, the country`s financial situation, interest rate expectations and trading of the asset in the strike market, among other factors.
Day trade operations
Day trade operations - to make a day trade operation means to buy and sell stock on the same day. That means, you buy or sell a certain amount of stock for a price, follow the price variation of that stock throughout the day, and reverse the position by buying or selling on the same day. And the difference between the sales price and the purchase price multiplied by the number of shares (also considering trading fees and taxes) is the result of the day trade, which can be positive or negative.
After market - allows stock trading at night, after working hours, electronically.
Operations are made by orders and closed automatically through a BM&FBovespa electronic trading system (Mega Bolsa). Orders sent have a maximum limit of R$ 100,000.00 per investor for the aftermarket and the prices of the orders sent during this period may not exceed the maximum positive or negative variation of 2% in relation to the closing price in the daytime session.
Laundering crimes or assets, rights and values concealment
This document features the criteria related to financial operations identification, registration and communication/the identification, registration and communication of financial operations:
- whose characteristics are exceptional with regard to the parties involved, the way they are conducted, and/or the instruments used;
- for those that objectively lack legal or economic basis, so there is the possibility that they constitute serious indications of laundering crimes or the hiding of assets, rights and values, as provided for in Law no. 9,613 of March 3, 1998 and other norms.
Law no. 9,613, in its article 1, typifies the crime of laundering as:
- Hiding or concealing the nature, origin, location, disposition, movement or ownership of assets, rights, and values resulting directly or indirectly from crimes such as:
- the illegal trafficking of narcotic substances or drugs and such;
- contraband or trafficking of weapons, ammunition or material to produce them;
- extortion by means of kidnapping;
- against the government, including the request, for oneself or others, directly or indirectly, of any advantage, as a condition or price for the practice or omission of administrative acts;
- against the national financial system;
- practiced by a criminal organization.
The broker, within the scope of its activities, should indicate to the Securities and Exchange Commission (CVM), the Banco Central do Brasil (BACEN) and the Financial Activities Control Council (COAF), a director responsible for complying with the established obligations and for signing any communication related to the matter.
The broker should register all its clients and keep their records, documents, and data duly filled out and updated, and keep them on file for 5 (five) years, even after accounts are closed.
In addition to the record information required for registration, data related to clients’ financial resources and earnings is required.
Evidence that a crime has been committed
The broker should be effectively aware, when registering clients, when operations are proposed and when they are executed, if there is evidence of a crime or suspicion of illicit activities in the following situations:
- An operation in which the proponent does not propose to comply with the record requirements or tries to induce those in charge of registration not to keep filed records that may reconstitute an agreed operation;
- Operations whose values are objectively incompatible with the professional occupation, income and/or financial status of any of the parties involved, based on the respective record information;
- Operations conducted repeatedly between parties in which there have been repeated profits or losses for one of those involved;
- Operations that show evidence of significant fluctuation related to the volume and/or frequency of trade of any of the parties involved;
- A proposal to buy or sell a large amount of commodities without knowing the origin of the resources or commodity;
- Those operations whose implementation contemplate characteristics that may constitute a technique to conceal the identification of those involved and/or the respective beneficiaries;
- Operations whose characteristics and/or implementation evidence, in a consistent way, activity on behalf of third parties; and
- Those operations that evidence a sudden and objectively unjustified change related to the operational modalities usually used by those involved.
Recording, analysis and communication of operations
The broker should keep a record of all financial operations of its clients and of those with values equals or higher than the limit established by CVM, BACEN or COAF, each in its sphere of competence, and which go over the normal operational limit.
The broker should communicate, within 24 (twenty-four) hours, any proposal or operation whose fixed limit has been surpassed and, at the same time, present serious evidence of a laundering crime or of the hiding of assets, rights, and values.
The broker, within the scope of the operational modalities it operates in, should observe for reporting operations that present indications of money laundering, the following:
- while working with securities, managing investment funds, security portfolios and investment clubs and/or making transactions of any type, tied to these securities and values, should report to the Securities and Exchange Commission - CVM;
- while working with fixed income securities, private and public, managing investment funds, security portfolios, or investment clubs tied to these securities and making transactions with assets referenced by interest rates, exchange rate or other financial/economic indicators, should report to the Banco Central do Brasil - BACEN;
- while acting with securities in the stock market environment, should report to the COAF- Financial Activities Control Council.
The communication necessary will be made, preferably, using electronic media and a copy will be added to the client`s documentation.
Noncompliance with the obligations established by Law no. 9,613, article 12, will subject the broker, as well as its responsible administrators, to the following sanctions:
- Monetary fine;
- Revocation of operational authorization;
- Imprisonment without right to bail or provisional release;
- Seizure of assets, rights and values.
Communications made in compliance with Law no. 9,613 shall not result, under the terms of the law, in civil or administrative responsibility for the institution, nor for the administrators in charge.
- Law no. 9,613/98.
- Decree no. 2,799/98.
- CVM Instruction no. 301/99.
- Ordinance no. 330/99.
- Bovespa Circular Letter no. 163/99.
- BACEN Circular no. 2,852/98.
- Circular Letter no. 2,826/98.
- BVRJ Circular SUPGE-077/99.
- COAF Resolution no. 007/99
UBS Brazil Broker Dealer
Rules and Instructions
CVM Instructions - this page of the BM&FBovespa website, you can find the explanatory syllabus, the full text published by CVM and a summary prepared by the BM&FBovespa operations department.
Market course - BM&FBovespa organized a series of courses for several levels of investors. Some are online, others are free. Check here.
Investment costs - There are different costs that should be considered when making investments. For example, there are costs charged by the stock market and the custody agent, such as charges, custody fees, and others. Click on the link to see BM&FBovespawebsite what they are and how they are charged.
There is also the brokerage costs, which vary from broker to broker.