Ibovespa – Trading The Bovespa Index In Brazil

The Bovespa Index, more commonly known as the Ibovespa, is the benchmark index of stocks traded on the B3 in Sao Paulo, Brazil. In this article we’ll look at the history of the Ibovespa, how it’s calculated and what it can tell potential investors. Finally, we’ll go into more detail about how you can start trading with the Ibovespa.

What is the Ibovespa?

The Ibovespa was formed in Brazil in 1968 as a theoretical portfolio of stocks that best represent the wider Brazilian economy. It takes its name from the Bovespa, the former name of the Sao Paulo Stock Exchange.

In 2008, the Bovespa merged with the Brazilian Mercantile and Futures Exchange (BM&F) to form BM&FBOVESPA. In 2017, BM&FBOVESPA took over rival company Cetip SA Mercados Organizados, and Brasil Bolsa Balcao SA – B3 – was formed.

The Ibovespa is a total return weighted index (which will be explained below) and, unlike other benchmark indices such as the FTSE-100 and S&P-500, does not have a constant number of constituent companies. Currently, 65 companies make up the index.

Trading Hours and Calculation Intervals

The trading hours for the Ibovespa are Monday-Friday, 10:00-17:00 America/Sao_Paulo Time (13:00-20:00 GMT). The index value is measured every thirty seconds during opening hours.

Other B3 Indices

There are many other B3 indices, all of which are total return weighted theoretical portfolios. These deal with different sectors, investment types and numbers of stocks. However, the Ibovespa is the main indicator of the Brazilian economy’s performance for both local and worldwide investors.

What is the Ibovespa Used For?

As a theoretical portfolio, the Ibovespa is intended to represent an overall picture of the Brazilian economy at any given time, both in terms of its value and its sector composition. As the benchmark index of the B3, it is also the go-to index for investors both in Brazil and around the world.

As Brazil is the largest economy in Latin America, the Ibovespa is also arguably a good barometer of the health of the whole Latin American economy.

Some economists have argued that, as well as responding to economic factors, the direction of the Ibovespa can also anticipate the future of the Brazilian economy. This has been noticeable when it has become bullish (showed an upward trend) whilst GDP has shrunk.

For instance, in 2016, Brazil was in the middle of an economic crisis and recession; GDP dropped 3.3%, but the Ibovespa rose 38.9% in anticipation of the impeachment of the then-president and the formation of a more fiscally-minded government.

How the Ibovespa Works

To be eligible for the Ibovespa, stocks must fulfil a number of criteria:

  • Be among the stocks which make up 85% of the total number of trades and financial volume of the Brazilian market over the preceding three portfolio cycles
  • Have actively traded in at least 95% of trading sessions over the preceding three portfolio cycles
  • Account for at least 0.1% of the total value traded on the cash equity market over the preceding three portfolio cycles
  • Not be a penny stock

Most of these criteria are fairly easy to understand; one of the reasons why the Ibovespa is popular with foreign investors. However, it would be helpful to define some of the terminology:

Total Return Weighted Index

The Ibovespa is a total return weighted index, and this is best explained by breaking it down into two parts:

Total Return Index

A total return index is one that tracks the movement of the prices of a group of stocks, whilst also assuming that any dividends or distributions made by the underlying are invested back into the index.

This is a potentially more accurate measure of a company’s performance than only measuring the yield of a stock. In terms of the whole index, you also account for companies that reinvest their yield rather than paying it out to shareholders.

Weighting

Weighting is the share of the index given to an individual company. Most indexes have a weighting cap to stop a particularly large company over-influencing the health of an index. In the Ibovespa’s case, a stock’s weight is calculated according to the total market value of its free float shares (see below), but there are two potential caps:

Firstly, the weight afforded cannot be more than double what it would be if the weighting was calculated by dividing a stock’s negotiability index by that of the whole index. If it is more than double, balance is maintained dividing the surplus amongst other constituent stocks.

Secondly, a stock’s weight cannot exceed 20% of the total weight of the index. The largest single stock currently has a weight of just over 10%.

Negotiability Index

Stocks eligible for the Ibovespa are ranked in descending order according to their tradability ratio, also known as a ‘negotiability index’. This is a complex equation that takes into account the number of shares traded in a company, the total value of those traded shares, the total number and value of shares traded on the Ibovespa during the calculation period, and finally the number of days in the calculation period.

Free Float

In calculating the negotiability index, only shares that are free float are taken into consideration. These are outstanding shares that are theoretically available for trading and exclude those held by company insiders (such as directors, CEOs etc.) or owned on behalf of the underlying by holding companies.

Portfolio Cycle

Each Ibovespa portfolio cycle lasts for four months – January-April, May-August, September-December – and begins on the first Monday of the first month of the cycle. Therefore, three portfolio cycles – as used in calculating eligibility for the index – is equivalent to a year.

Penny Stock

Penny stocks are classed as stocks that have traded at an average price of less than one Brazilian real (R$) during the previous portfolio cycle.

The negotiability index and penny stock criteria were introduced in 2013 when the Ibovespa’s methodology was updated in response to the difficulties caused by OGX.

Previously, the Ibovespa had been weighted by total amount of shares. OGX, a major oil company, held one of the largest weights in the index. However, wrong forecasts about the amount of oil it could find in the Atlantic Ocean helped to wipe out 99.3% of its value, leaving it trading at less than R$1 over a prolonged period of time. This combined with its weight meant OGX dragged the value of the whole Ibovespa down.

The new criteria meant OGX could be delisted from the index.

Changes To The Bovespa

Rebalancing of the Ibovespa takes place at the end of each portfolio cycle. This is when the negotiability index for each company is recalculated and weighting reset.
To maintain transparency and confidence in the liquidity of the Ibovespa, the B3 release three previews that anticipate the likely constitution of the index for the next cycle. These are released on:

  • The first business days of April, August and December (i.e. the first business day of the month before the first month of the next cycle)
  • The first trading session after the 15th of those months
  • Before rebalancing (on the last day of the closing cycle)

The calculations that actually determine the constitution of the Ibovespa for a given cycle are performed after the release of the second preview.

What You Need to Know About the Ibovespa

As well as reflecting the performance of other stocks, the Ibovespa can act as underlying for ETFs, futures, options and other products.

To mitigate large drops in the Ibovespa, it has what is known as ‘circuit breaker’ rules. If the total index value drops 10% below the closing value of the previous day, trading is stopped for 30 minutes.

If, on resuming, it drops to 15% below the closing value of the previous day, trading stops for another hour. If, on resuming, it drops again to 20% below the closing value of the previous day, the exchange may decide to suspend trading for a set period of time.

Landmarks

  • The base value of the Ibovespa on its inception in 1968 was 100.
  • During the 1980s and 1990s, Brazil experienced episodes of high inflation. To help control the effect this had on the value of the Ibovespa, its total value was divided by 100 in 1983 and by 10 another 10 times between 1985 and 1997.
  • The Ibovespa’s all-time closing high of 99,993.92 points was reached on 18th March 2019. Earlier that day it had hit 100,000 points for the first time.
  • The Ibovespa’s all-time intraday high of 100,439 points was hit the following day.
  • The lowest value of the Ibovespa, since its last division in 1997, was 4,761 points in 1998.
  • The current amount of shares listed on the Ibovespa is just under 59 billion.

Performance Points

There are many factors which affects its health and, therefore, the performance of the Ibovespa. Two of the main factors are domestic politics and interest rates.

To take the latter first, Selic is the key Brazilian interest rate set by the Central Bank of Brazil. It’s currently at an all-time low of 6.5% (the average for the preceding twenty years had been just under 15%, with highs of up to 45%). This is helping to stimulate market activity as consumers and investors have more money to spend, or find it cheaper to borrow; this leads to increased economic activity which drives stock prices up.

Returning to the former, the Brazilian economy is closely tied to domestic politics. As we have seen, the hope in 2016 of then-president Dilma Rousseff being impeached for, amongst other things, economic mismanagement, helped the Ibovespa to rise.

In January 2019, the controversial Jair Bolsonaro became Brazilian president on a ticket promising to curb government spending, reduce government debt and encourage economic growth. This encouraged markets to reach their all-time highs, but a lot depends on whether the government successfully carries out major pension reform.

At the same time, inflation has been rising as has unemployment. All of these factors have the ability to affect the health of the Ibovespa.

It should also be noted that, despite its record highs in points, the Ibovespa, when measured in US Dollars, is comparatively low in value compared to past highs.
Investors who are interested in trading on the Ibovespa or using it as an underlying for a product should be aware of all of these factors.

Brazil, whilst a large economy, also has an element of political volatility built into it; if you are either unfamiliar with its political landscape, or are not prepared to become closely interested in it, then the Ibovespa is not something that you should invest in.

The Ibovespa’s Biggest Companies

If we consider the component stocks of the Ibovespa by size, then multinational mining corporation Vale S.A. is the index’s biggest player with 10% index weighting.

That said, part-publicly-owned petroleum multinational Petrobras lists its preferred and common shares separately on the Ibovespa. Cumulatively, these have an index weight of just over 13%.

The largest Ibovespa sector is, by far, the financial, with banks alone accounting for 28.5% of the index weight. The two with the largest presence are Banco Bradesco (which, like Petrobras has separate listings for common and preferred shares) and the Brazilian arm of the Spanish Banco Santander.

OGX, the oil company whose poor performance in relation to its size instigated the 2013 change in Ibovespa methodology, is not currently listed on the index.

How to Start Trading on the Ibovespa

To the first-time trader, it may seem that the only way of trading is buying shares in a company for one price and selling them when their price goes up. In fact, this is just one way of trading and doesn’t take into account the vast amount of strategies and indicators there are in trading stock.

In this part of the article, we’re going to look at how to get started trading on and with the Ibovespa. For more detailed explanations of some of the terminology used, we have a wealth of articles and resources to help you get acquainted with trading.

But first let’s look at the basic steps:

Find the Right Broker

If you’re going to do any form of stock market trading, you’ll need a trading broker who is both reputable and suited to your needs. Some of the things to consider are:

Commission

Whether you’re trading stocks, options, ETFs or any other kind of financial instrument, it’s likely that your broker will charge commission. Rates can vary, so it’s best to consider what you want to trade and roughly in what volume. If, for example, you invest in a large number of shares with a brokerage that charges commission per share, you’ll end up minimising your potential profits.

Trading on Margin

Some brokerages will loan you money to part-fund your trading, with the loan secured against the securities in your account. This is known as trading on margin. It might sound an attractive proposition, but trading on margin is a high risk strategy that is reserved for experienced, professional traders. The reason for this is that should the assets in your account fall below a certain value, the broker can issue a ‘margin call’, which means you have to either put more funds into your account or sell assets. Alternatively, the broker can liquidate your account without your consent, leaving you with nothing.

Trading Platforms

A trading platform is a form of online software provided by a broker which lets you trade on markets. A good trading platform gives you all the information you need about the performance of markets; real-time data, historical data, the ability to plot averages and, most importantly, the ability to buy and sell stock (also known as opening and closing a position).

Trading platforms generally come at a price, but can be offered for free in return for you conducting a certain volume of trade per month with the broker providing it.

It’s vital to remember that different trading platforms are tailored for different trading needs. For instance, there are ‘commercial’ platforms which are tailored to day-traders and offer more assistance in terms of tools for decision making. ‘Prop’ platforms, on the other hand, are aimed at professional traders with specific requirements and trading styles.

Therefore, if you’re planning to trade on the Ibovespa, then it’s important that you not only choose the right broker, but one which can provide you with the appropriate trading platform. It’s pointless getting a state-of-the-art prop platform geared towards options trading if you only want to buy and sell shares. At the same time, you want the best platform in your chosen field.

A platform that is cheap but full of glitches, or that lags, is going to cost you money in the long run as you could miss a golden opportunity to buy or sell.

Choosing the Right Stock

Volume

When looking for the right stock to open a position on, or the right time to close an existing position, a good indicator is volume. In the context of markets, volume means the amount of shares that have been traded. Each transaction is only counted once (so if A sells 100 shares to B, the volume is 100, not 200 because A sold to B and B bought from A). The larger the volume that propels a price shift, the more reliable that price shift is as an indicator of a trend.

Volatility and Beta

Volatility is an important measure of how stable a stock’s price is. It is calculated by using historical data to predict the price range of a stock. The higher a stock’s volatility, the more likely it is to move price by a larger margin than low volatility stocks. Day traders looking to profit from short-term price movements will naturally be drawn to the stocks with the highest volatility.

One way of measuring comparative volatility is beta. Beta is a formula which compares the volatility of a given stock against the volatility of the whole of an index. Every 0.1 of beta corresponds to 10% and so the most neutral position of Beta is 100%.

This is when the unsystematic risk of a stock is most strongly correlated to the systematic risk of the whole market. A stock with a beta of less than 1.0 generally has lower volatility because its price is more stable or moves more slowly over time. Stocks with a beta above 1.0 have higher volatility because their prices are moving more than the market average.

By way of definition: Unsystematic risk exists in stock because there are factors which can affect the underlying company or sector to drive values down and can be hedged against by investors having a diverse portfolio of securities. Systematic risk exists in indices because there are factors that can affect an entire market – such as the 2008 global crash – that no amount of diversity can avoid.

Alternatives to Share Trading

When we talk about securities in trading, we mean all the different tradable products available: stocks, options, ETFs, futures, mutual funds, bonds etc. As with choosing a broker, it’s important to make the right choice for you as all securities come with different pros and cons. For more information, we have an article explaining some of the different kinds of trading here.

Trading with the Ibovespa

As well as trading on the Ibovespa, investors can also trade with the Ibovespa. Many brokers offer products which use the total value of the index as an underlying. One example of this is an Exchange-Traded Fund (ETF).

Exchange-Traded Funds (ETFs)

An ETF is a basket of securities that tracks an index – in this case the Ibovespa. ETFs can consist of all kinds of different securities but, for simplicity’s sake, we’ll imagine that we’ve bought an ETF that contains shares in every constituent Ibovespa stock. The value of our ETF will go up or down in relation to the value of the Ibovespa over the day’s trading.

One major advantage of ETFs is that they generally tend to be low-commission purchases and are cheaper than buying all the constituent stocks yourself. A worry about them is that the demand for them artificially inflates the value of indices, causing price bubbles to form and burst.

Tips

Here are some tips to help you prepare for life as a trader:

Watch and Read the News

As discussed earlier, you cannot hope to successfully invest in the Ibovespa if you aren’t familiar with Brazil’s domestic situation and politics. You can keep track of these through watching business news channels or programmes on TV, such as Sky News Business Channel, BBC Business Live and Bloomberg Television. The Financial Times, a daily newspaper dedicated to the markets and business, is also printed in the UK.

There are also countless websites, such as Bloomberg and Yahoo! Finance, as well as the website of the Ibovespa itself.

You should also stay up-to-speed on world news for anything that might affect the Ibovespa.

  • Will movements on stock markets operating in different time zones affect the Ibovespa’s opening price?
  • Will elections abroad have a bearing on worldwide markets?
  • Will the financial performance of a multinational with a significant presence in Brazil affect share prices?

Although traders are often trying to predict the future, they can only do so by being completely aware of current affairs.

Get Educated

There’s a bewildering number of websites, courses, YouTube channels, books, webinars and software available; all claiming to teach you how to become a successful trader.
Like trading itself, trading education can be a minefield of potential scams and get-rich-quick schemes.

Here at daytrading.com, we have a large selection of articles to help educate you and help you make informed choices about your trading – including this one on the best trading education available online.

Become an Auto-Trader

Nothing to do with the used car magazine, auto-trading is where you program your trading platform to make trades based on your trading preferences. As you can imagine, this system has advantages but also inherent risks. Take a look at our guide to auto-trading here.

In Conclusion

The Ibovespa is a fascinating index to watch and study, not just because of its history and methodology, but because of its status as the benchmark index of the largest economy in Latin America. As a potential index of investment, a note of caution should be sounded due to the political upheavals of the past few years. The market has been displaying a bullish tendency, but only those who are experienced traders or are closely following Brazilian politics should consider investing.