How are stocks traded?
The investor sends a stock purchase or sale order to the broker he/she is a client of. The broker, through its dealers, places the order in the Mega Bolsa, the BM&FBovespa electronic trading system. If there is an order in the opposite sense for the same value, the deal is immediately closed.
What determines the price?
The stock price is determined by market investors who, placing stock sale or purchase orders with the Brokers they are clients of, establish an offer and demand flow for each stock, leading to the establishment of the stock`s fair price.
The offer/demand relation for a certain stock, which influences the valuation or devaluation process of a stock, is related to the historical behavior of prices and mainly to the future performance prospects for the company that issued the stock.
Such prospects can be influenced by news about the market in which the company acts, company balance sheet disclosures (with favorable or unfavorable data), news about company mergers, technology changes and many others that may affect the performance of the company issuing the stock.
How is a stock high or low determined?
It is necessary to observe its fluctuation, that is, the (positive or negative) stock price variation over a certain period of time. We determine if a stock is high or low by comparing it with the last traded price and the closing price of the previous day. Thus, if the last price traded is higher than that of the previous day’s closing price, the stock is up; if it is lower, the stock is down.
Example: if stock X’s closing price the previous day was R$ 1.00 and today, in the first trade made of the stock the effective price is R$ 1.05, we say that the stock had a positive fluctuation of 5%, that means, it is up 5%. In case/If there is a later trade of the stock at the price of R$ 1.03, the positive fluctuation is 3%; and so forth throughout the day, always comparing the quotation price to the previous day’s closing price.
What is and what is the purpose of an index?
A stock index is a performance indicator of a theoretical stock portfolio. The purpose of stock indexes is to serve as an average indicator for the stock market behavior as a whole, or of a specific market segment (in the case of restricted and sectoral indexes). Thus, indexes are designed to show whether market stocks have appreciated or depreciated, on average, over a certain period of time.
Stocks indexes are calculated by the stock exchange or by specialized institutions.
What is a theoretical portfolio?
It is a group of stocks in which a theoretical investment is made that is represented by an index. That is, they are the stocks chosen to make the index.
Who chooses the stocks included in an index?
Each index has an objective (for instance, to represent the whole market or only one segment of it), and, therefore, has specific criteria to choose the stocks that will be included in its portfolio. These criteria are called “inclusion criteria” and are part of the BM&FBovespa index methodology.
Should the companies removed from an index be considered bad investments?
No. Inclusion or exclusion of a stock from an index portfolio does not reflect the merits of the company itself. Its possible removal reflects the current index structure only, and the fact that the stock no longer meets the criteria to be part of the index.
Many of these companies may be excellent investments when analyzed.
What are the types of stock indexes?
Price index: an indicator that considers stock price variations only, adjusting the theoretical quantities exclusively for returns in stocks. Other cash returns (e.g.: dividends, subscription rights, etc.) are not considered in calculating this index.
Total return index: a price index value increased by the reinvestment of dividends and other returns distributed by issuing companies. Returns are reinvested in the index on the “ex-profit” date (the date on which the stock starts trading with the return already discounted from its value). Thus, this is an index that measures the total return of the stocks that make up the portfolio.
Broad indexes: represent the market as a whole. They can be composed of all the stocks listed in that market, or of a group of stocks that have significant participation in the total trade, thus reflecting the average performance of all stocks in an accurate way (for instance, Ibovespa represents, at least, 80% of the number of trades and of the financial volume traded in the strike/spot market, as well as approximately 70% of the traded companies` capitalization).
Restricted Indexes: represent the behavior of a particular part of the market, such as the group of most traded stocks (“blue chips”) or the group of stocks best rated by investors, but not included among the most traded (“second line” stocks).
Sectoral Indexes: represent the behavior of specific economic sectors (e.g.: electric power; telecom; steel; etc.), being composed exclusively of stocks of companies in these industries.
Can indexes predict whether the market will go up or down?
No. Although some market analysts - technicians or chartists – use the historical behavior of indexes as a base for their projections about the future behavior of a market or sector, the purpose of indexes is to accurately represent market behavior to the present. That means, to show where the marked has been (not its future).