1. What is it?
Shares or “stock” are small portions of a certain company. When buying a share, it is just like you were buying a very tiny part of the equivalent company. Thus, acquiring shares make you part of that company, it is the same as having a part of it. Theoretically, you are the owner of a fraction of any building, car, piece of furniture or any other asset of that company. And the more shares you have, the larger will be your stake on it.
It is quite easy to understand what a share really is. However, getting acquainted with the rules that manage the shares market is something more complicated to do, and requires some time to get the experience enough to rule on that market.
We cannot buy shares on any existent company. You can just do for those which are open and listed in a stock exchange. When a company decides to be listed in a stock exchange, it makes an IPO (initial public offering), or a very first offer, in which some shares of the company are sold to the public in general. The main objective of a company when it becomes listed is to raise some capital for investments, increasing production and lift its profits in the future.
A company’s shares are issued and sold directly to the public in the primary market. In the secondary market, existent shares are traded through the stock exchange. So, when you purchase share using a home broker, you are actually dealing in the secondary market.
For individuals, there are two different ways of investing in shares. The first is through an investments proxy (a certificated professional who is authorized to buy and sell shares on behalf of his clients, or by their request). A second way involves a Home Broker. For both, you must have an account open in a broker company.
Share prices in the secondary market change depending on the offer/demand influence. The offer is affected by the global economic scenario and also by the expectations of stakeholders about the future of this particular company, regarding its ability to make profits and cash. If a company is making profits and the economic scenario is not bad, future perspectives of income and results for that company are good, and people should be looking for buying its shares. Hence, share prices are expected to increase. Otherwise, meaning the company is registering losses and a crisis affects the market, a lot of people should be selling their shares out, which forces prices down.
Remember that the most important thing when buying shares is to follow its prices and also the future perspectives for that company. If the company is making money and expectations are good, shares must go up. But if prices are reaching historical peaks, one must think twice before getting some shares, as prices can hike even more, although the most likely is a drop, or uncertainties about the future.
2. Features and behavior
Daily schedule for dealing with shares work this way:
Pre-Market (Opening): 9h45am to 10am
Dealing Period: 10am to 16h55pm
Closing Call: 16h55pm to 17pm
After-Market: 17h30pm to 18pm
Auctions happen inside the shares market in order to settle fairer prices for the assets, and prevent any violent changes on pricing. They take place during the Pre-Market or the Day Closure, or anytime that huge changes happen.
Bovespa itself uses a criteria to define when an auction should be happening.
1. In the opening, auctioning occur for a period of 15 minutes, which is known as the opening call, and basically settles the daily initial prices for shares.
2. During the closure, auctioning happens for 5 minutes, or the closing call, which settles the closing value for all traded assets.
3. If a share shows a change between 3% to 9.99% (either positive or negative), and is part of Bovespa Index, this particular share will be auctioned at least during 5 minutes.
4. If a share shows a change exceeding 10%, and is part of Bovespa Index, it will be auctioned for 15 minutes.
5. If such change is out of a moving average of the share for the last 30 days, an auctioned will be also called for that.
Have in mind that any buying or selling order put during the initial auctioning will not be computed, even if you were dealing at the same price levels. Orders are not activated during the first 15 minutes after the opening. Another thing to have in mind is that cancelling buying or selling orders during the auctioning is also impossible, but you can do it once the auction is finished.
It is a mechanism used by Bovespa when violent price changes happen, in order to balance and control buying or selling orders. If Ibovespa drops more than 10% in a day, Circuit Breaker is called and the market stops for 30 minutes. After that, the exchange is restarted, but if Ibovespa’s drop even more, reaching 15% down, dealing is once more called off, but for an hour this time. Finally, if Ibovespa’s drop reach over 20% in a day, then the stock exchange suspends trading activities for an undetermined period.
Everytime you buy a share, cash liquidation actually takes place three days after the operation. That means when you buy shares, they will take three days to be transfered to you. Also, liquidation is made by a clearing house, Companhia Brasileira de Liquidação e Custódia – CBLC (In English, Brazilian Company of Liquidity and Custody). As a matter of fact, all purchased shares remain under CBLC custody, in order to assure market rules are followed and make the operation safer to all parts involved. For instance, if the broker you hired goes bankrupt, your shares are safe under CBLC control. If that happens, you can order CBLC to transfer your shares to a new broker.
Rights and remuneration from shares
Dividends: a payment made for shareholders by a company, usually as a distribution of profits. By law in Brazil, companies must distribute at least 25% of their net profits. Timing for that to be happening vary depending on comapny or share, and may be occurring monthly, each six months, annualy, etc. The company sets up the stake to be distributed in a general asssembly, and such amount is then divided to the number of issued share. Paid dividends are not subject to income taxes, as the company has been already taxed on profits. Once dividends are paid, shares pricing on the market is adjusted to reflect that.
Interests on own capital: created in 1995 as a way to compensate currency losses within the companies balance sheets. The company may pay shareholders to the limit of the TJLP index. Once this amount is taken as an expense on taxable profits, companies are allowed to deduct that from their tax returns. For the shareholders, though, there is a 15% withholding income tax. Again, after interests on own capital are paid, shares value are adjusted in the market to reflect that.
Subscription: share subscriptions are a way of companies to issue new shares in the market, in order to raise more cash. The company allows shareholders to acquire new shares for a determined price during a period. Shareholders are not forced to do it, though. If they have no interest in doing that, they can also sell the buying options to a third part. If they want to exercise the option, they can just communicate their brokers. Usually subscription prices are fixed in a level below the market pricing, making the proposal attractive. Once the subscription is over, shares pricing is adjusted to reflect it.
Bonuses: bonuses comprise the free distribution of new shares of a company, due to a capital increase backed on profits and reserves. New shares are distributed proportionally to already own shares. Sometimes bonuses are distributed in cash, and the value corresponds to the new incporporated capital. Cash bonuses are rare, though. Once bonuses are paid or distributed, shares pricing is adjusted to reflect it.
Split: is a stock dilution results from issuing additional common shares of a company, with no increase of cut in the social capital. For instance, if you have 100 shares of a company, priced at BRL1.00 each, and the company dilutes the capital in twice as much shares, you’ll be given 100 new shares. However, share prices will be cut to BRL0.50. No changes for you, as you have the same stake at the company, but that betters shares liquidity. If a share reaches a price that is too high, then it becomes less tradeable, what can be fixed by leveraging its market value by issuing new series of shares.
Inplit: that happens when a company actually reduces the number of shares, by grouping a number of shares into a single one of a new “serie”. Basically the opposite of a stock dilution. Using the same example, if you have 100 shares priced at BRL1.00, you can have them cut to only 50 shares – however, those new shares cost BRL2.00 each. Companies use it to make their shares more visible and attractive to the market.
Taxes and costs
Brokerage fees: it is a fee charged by a broker when trading shares. Such expense can either fixed, variable (over the trading value) or even both. That can be charged at any new order (when buying or selling shares) or under a package (minimum orders per month). The value can change from broker to broker, and then Bovespa itself stipulated a pricing table for them to establish their fees, as follows:
Bovespa – Brokerage Fees Table
|R$ 135,07||0,00%||R$ 2,70||R$ 2,70||
|R$ 135,08||R$ 498,62||2,00%||R$ 0,00||R$ 2,70||
|R$ 1.514,69||1,50%||R$ 2,49||R$ 9,97||R$ 25,21|
|R$ 1.514,70||R$ 3.029,38||1,00%||R$ 10,06||R$ 25,21||
|R$ 3.029,39||∞||0,50%||R$ 25,21||R$ 40,35||
ISS (Tax Over Service): Over brokerage, the local services tax can be applied. That can be diferente depending on the city. In São Paulo, for instance, we have 5% of tax. Thus, if a broker’s fee is fixed at RL20.00, ISS will be BRL1.00. Some brokers absorb this cost, giving their clients an extra benefit.
Custody costs: costs of custody are monthly charged by brokers, in order to cover operational costs with CBLC, the market official custodian. Such expenses are charged by the end of each month (last work day), but the debit happens just in the third work day in the subsequential month. Bovespa also stipulated a table that shows how much the brokers should charge from their customers:
Monthly custody fees
- Position or account with no activity BRL3.00
- Position or account with activity in variable income assets BRL6.90
- Position or account with activity in fixed income assets BRL20.00 per year, plus monthly pro-rata after the first year
Custody surcharge: in addition to custody fees, there is a kind of surcharge charged by brokers. It’s monthly calculated, and it is cumulative and retroactive, based on the whole invested amount deposited at CBLC. A percentage is charged over this amount, but positions minor than BRL300,000.00 are exempt. For the rest of them, it follows the table below:
|Amount||% per year|
From R$ 0 to R$ 1.000.000,00
From R$ 1.000.000,01 to R$ 10.000.000,00
From R$ 10.000.000,01 to R$ 100.000.000,00
From R$ 100.000.000,01 to R$ 1.000.000.000,00
From R$ 1.000.000.000,01 to R$ 10.000.000.000,00
|over R$ 10.000.000.000,01||
Emoluments: dealing and trading fees charged by CBLC and BMF&Bovespa. For individuals, the fees reach 0.005% from CBLC and 0.0275% from BM&F.
Forward operations are contracts involving shares sales or purchases at determined prices, to be exercised at a certain time. The investor is promised to buy or sell a certain amount of shares for a fixed price, for a certain period of time, just like an option. The minimum period of time for that is 16 days and the maximum 999 days. Settled prices comprise the prices of the shares involved plus interests to be negotiated by parts.
As operações contratadas poderão ser liquidadas na data de vencimento ou antes caso seja solicitada pelo comprador ou pelo vendedor. Elas também poderão ser liquidadas integralmente, sendo efetuado pelo total do valor contratado, ou pro rata, sendo efetuada no vencimento.
It also necessary to save a guaranty margin in shares or cash. In case of a forwards seller, he needs to save the difference between the value for the position taken minus the current prices. These operations are put in a contract and issued and registered in the stock exchange, in name of the broker which made the operation.
Besides the traditional market, there are other tree types of forward markets:
Flexible Term: it is a new method of dealing with the forward markets. That differs from the traditional forwards, as it is possible to change the object shares for a contract. If the buyer wants so, he is allowed to change the shares specified in the contract. If the seller does not have the shares requested by the buyer, current shares are sold and the cash is held by CBLC. Thereafter, the buyer can use this cash for acquiring the shares he was looking for.
Forward points: in this type of market, all trading happens in points, with each point being equivalent to a forward value in BRL, to be adjusted and updated by an index agreed by all parts involved. That means the share prices will be converted in points to be updated by a stipulated index or rate accepted by Bovespa. When the contract in liquidated, then points are converted back to BRL.
Forwards in dollars: in this method, the contract’s value is daily updated using the exchange rate for US dollars, or the PTAX. Liquidations are exclusively financial, and guarantees are mandatory for buyers and sellers.
In the futures market, shares are traded between parts for execution in a future date, previously authorized. Usually, future prices are expected to be the same as current, plus an interest rate. Futures market is considered an evolved forwards market.
For this kind of deal, daily adjustments apply, and the difference will be paid or received by investors, from comparing two different trading days. For that reason, guarantees are required for covering those adjustments.
In the shares market one can rent shares from another investors. This operation implies in transfering the custody of some shares to another investor, who is renting them for a service fee, freely dealt between the parts. The investor who rents the shares needs to offer a guarantee.
Usually, shareholders are long term investors with no interest in selling their shares. For that reason, some of them actually ‘rent’ shares as a way to earn an extra income from their positions. The takers, for their turn, can sell or re-buy the rented shares any time, making their profits. They can also use the rented shares as a guarantee for trading futures or launching options.
The shares taker is not informed who is the actual owner of the shares, and the operation is fully managed by CBLC. In the transaction, shares are temporarily transferred to the taker, for a previously determined period. All attached rights, such as dividends, for example, remain with the share’s owner. However, the taker is entitled to vote in assemblies.
All operations are tied to a contract, which brings the duration of the deal, whether the owner can request shares back before expiration or not, how the owner is to be paid, and which and how shares will be traded, and so on.
By the expiry date, shares are transferred back to the owner. Comissions paid to the owner are subject to income taxes as follows:
- Expiration date within 180 days or less: 22,5% (just over profits)
- Expiration date within 181 to 360 days: 20% (just over profits)
- Expiration date within 361 to 720 days: 17,5% (just over profits)
- Expiration date within 720 days: 15% (just over profits)
The margin account is a mechanism used by some brokers which provide credit lines to their clients being purchasing assets, for a monthly fee and restrained to an agreed limit. Fees can change depending on the broker, although it commonly reaches about 4.5% per month. Limits can also change, but usually reach 100% more than the available capital. For instance, if you have BRL1,000.00 invested, the broker can lend you another BRL1,000.00. It works just like bank overdrafts, allowing investors to leveraging their positions. For such, the broker requires some guarantees, sometimes the invested value. On top of the monthly interests, the client pays the IOF tax, deducted by the broker in a daily basis.
Shares can be divided in two categories:
1. Common Stock (ON): the grant rights to vote in company’s assemblies, but lack of some advantages
offered by preferred stock.
2. Preferred Stock (PN): offer solely a stake on company’s results, giving the holders a priority on distributed dividends, though, as well as in any kind of capital reimbursement. As mentioned, companies must distribute 25% of net profits to their shareholders. Preferred stock grants no rights for voting in companies’ assemblies, but can do it, if a company remains two years without distributing any dividends.
It’s not possible to forecast the exact profitability from investing in stock. It can either go up or down. In fact, making forecasts on possible moves on shares pricing is an activity developed by experienced analysts, who sometimes fail as well. In some cases, one can double the invested amount in a matter of days, but can also lose cash and never get back.
Investing in stock requires a good understanding on markets, and even so involve a lot of risk. One can lose the whole money (although it rarely happens). Also, some shares can pass through long period of drops. When deciding to invest in shares, the investor must be aware that the money can be eventually lost, even in a short term, so the better is to invest some capital he doesn’t need immediately. Investor’s best tool is good information. Analyzing scenarios and the targeted companies is crucial for making profits from investing in stock.
When investing in stock, one is exposed to income taxes at a rate of 15% on profits. Base calculations for the income tax are equivalent to the profits made from executed positions month by month, excluding evetual costs and expenses for trading the assets, such as custody and brokerage fees.
Also, one can use losses to reduce future incidences of tax. For instance, if you made losses from an operation, you can compensate it in a future operation in which profits were made. Remember, however, that day-trade operations can only be used to compensate other day-trade operations.
The investor himself is responsible for paying the income tax. However, for a monthly selling amount of BRL20,000.00 or lower, investors are exempt of taxes. The income tax must be monthly calculated and paid until the last work day of the subsequential month, under the tributary code DARF nº 6015.
Also, there is a withholding income tax of 0.005% on the invested amount, to be deducted by the broker or bank on top of any profits made, monthly.
Share dividends, on the other hand, are not subject to income taxes. Interest on own capital, though, pay income taxes in a rate of 15%.
- Higher profits compared to other investment options;
- Tax exemption for a selling amount lower than BRL20,000.00 per month;
- It pays dividends and interests on own capital, which generates a constant flux of profits, sometimes higher than benchmark interest rates (Selic).
- Shares are not convered by the guaranty fund – FGC;
- Risky and volatile investment, not recommended to conservative investors or those unable to accept market floats;
- Real possibility of losing money;
- If you don’t have enough time for following and studying the market deeply, do not invest in stock, once a good knowledge is mandatory.