1. What is it?
The Stock Exchange Index, known in Portuguese as Bovespa, Ibov or Ibovespa (Bovespa is the name of the Brazilian Stock Exchange), is the most important indicator in the local stock market. Created in 1968, this index represents the average performance of the main stock listed in the Stock Exchange, and it’s composed by stocks with the highest trading volumes.
Ibovespa’s value represents, in Reais (the Brazilian currency), a theoretical stock portfolio that would have been acquired in January 2nd, 1968: in theory, no extra investments have been made and, for calculation purposes, only profits to the portfolio are considered (base value: 100 points to a standard lot), like dividends received, sale of subscription rights and shares received in bonuses. In other words, it is as if you had bought in 02/01/1968 a several sticks, thus forming a portfolio of stocks (called IBovespa), and its updated daily since then in currency value (Reais), without making any additional investment, only the reinvestment of dividends, exercise of rights and receiving bonuses, that is, an adjustment is made considering the investor sold the shares at the last price prior to the commencement of trading “ex-provent” and used the proceeds to purchase the same shares without the benefit distributed (“ex-dividend”).
The methodology involved in calculating the index has never been altered. Modifications were conducted merely to better present or publish results, never directly affecting the numbers. An example of the base calculations follows:
1 – Divided by 100, in 03/10/1983;
2 – Divided by 10, in 02/12/1985;
3 – Divided by 10, in 29/08/1988;
4 – Divided by 10, in 14/04/1989;
5 – Divided by 10, in 12/01/1990;
6 – Divided by 10, in 28/05/1991;
7 – Divided by 10, in 21/01/1992;
8 – Divided by 10, in 26/01/1993;
9 – Divided by 10, in 27/08/1993;
10 – Divided by 10, in 10/02/1994;
11 – Divided by 10, in 03/03/1997.
These divisions were necessary to get a better disclosure index, for if there were such divisions, today the index would have very high values, making it difficult to analyze and compare the numbers.
The Ibovespa index represents more than 80% of the number trades and financial volume actually negotiated in the cash market of the Brazilian Stock Exchange. It’s calculated in real time by the Exchange itself, considering prices of all transactions involving the stock in the imaginary portfolio. It can also be followed online from any place in the globe.
Some practical examples of the stock listed in the Ibovespa are: Petrobras, Vale, Gol, Itaú and Bradesco, among others.
2. Calculation Methodology
So that a stock can be part of the Ibovespa, some criteria must be met. The 12 months preceding the insertion will be considered for the criteria analysis:
- Being part of a stock list that represents 80% of the negotiation’s accumulated volume for a set period of time;
- Participate in over 0.1% of the total traded volume;
- Have suffered trading in over 80% of the total trading sessions in the period.
If a stock is considered for the index and doesn’t meet at least two of the above listed criteria, it will be excluded of the Index. Stocks of companies undergoing administration, bankruptcy process or with trading suspended for a long period of time will not be inserted in the Index either. When exiting these special circumstances, a company will then have its trading considered from the moment the Stock Exchange understands the special circumstance was stopped. If one of its components is suspended, the Ibovespa will consider the last trading price registered until the situation is again made normal. If the suspension lasts for over 50 days or in the event of a negative prognosis for the suspension period, the stock will be excluded from the index and adjustments will be made to ensure the index continues.
Mending of the portfolio is re-evaluated every four months. This evaluation is conducted based on the previous 12 months, and attributes a different significance for each stock inside the index, considering the periods of January to April, May through August and September through December. The higher the trading numbers and volumes in the cash market, the larger the significance of the stock for calculation purposes.
Two of the most significant stocks in the Ibovespa currently are Petrobras and Vale, with a 16% of the total index, as per the start of 2013. Following Ibovespa is crucial to understand the Stock Exchange in recent years. As well, comparing it with other such indexes (as the ones for fixed income investments, for instance) will help analyze not only the volatility of the investment but the expected profits also – assisting one in better choosing an investment fitting their profile.