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The investment decision process.

Investment Process

The investment decision process

The investment decision process involves some basic steps so that you can truly maximise your investments.

You should follow these steps:

1st Establish your investment goals - ask yourself 'Why (am I investing)?;
2nd Depending on your goals, set an investment term - ask yourself 'How long (am I investing for)?';
3rd Keep in mind what type when you will make your investment - ask yourself 'How often (will I invest)?';
4th Think clearly about how uncertain you are willing your investment results to be - ask yourself 'What risk?';
5th Once you've established the ground rules for your investment, you need to look within the financial market for the financial instruments you want to include in your investment portfolio. Here you need to answer the 'What risk?' question;
6th Depending on how much you have to invest you must also, before you build your portfolio, decide how diversified you want your investment to be - ask yourself 'How many tranches?';
7th In order to properly manage and monitor your investments you must have access to comprehensive and updated information on the evolution of your investments. So before making up your mind, you need to know 'What information?' you need.
8th After you've found an answer to all these questions, you'll be able to make a more informed investment decision and start building your portfolio.

Set your investment goals

Setting investment goals is the first step in the decision process. 'Why am I investing?' is a question that clearly limits which investments you'll make and what assets will form part of your portfolio.

Set Qualitative Goals

Investors always have certain goals they want to reach within a certain time period. So your first step is to structure your information and clearly establish your goals and the projects you wish to accomplish in the future. It's very important you make a list of, on the one hand, your short-term, and on the other, medium and long-term goals, and prioritise them according to their relative importance. For example, it's quite common to give top priority to your children's education, purchasing your future home, building a nest's egg for your retirement, planning your taxes, maintaining and maximising your savings, etc.

Set Quantitative Goals

Each qualitative goal (holidays, studies, inheritance, etc.) should be linked to a quantitative goal. You have to set the amount that you need to reach by the end of your investment term to meet your goals. For example, 'Have 50,000 Euros in 3 years' time to make the down payment on a flat' or 'Have 25,000 Euros by the time Mariana turns 22 so that she can take her master's degree abroad.' Based on this information and your current portfolio, you can more easily decide how much and how you want to invest the amounts you earn.

Tie Goals to Investments

Once you've gone through the above steps, you need to try to link your current investment portfolio to each respective goal. This means you'll need to create small savings 'boxes', each with its specific goal, and list the means you have to reach each goal. This way, later on it'll be easier to allocate available funds to whichever investment necessities you've determined.

Set your investment term

As you can see from the previous example, choosing an investment term means that first you must set your investment goals. Indeed 'How long?' does not have one sole answer, but as many as our savings goals.

Order your goals by investment terms

As a general rule, investment terms are divided into three big groups: short term (up to a year), medium term (1 to 5 years) and long term (over 5). The investment term bears a lot of weight in building a portfolio and deciding on its risk level.
It's very important that you order your various investments by their investment terms. Short-term investments are normally constituted by less risky assets (and contrariwise, long-term by higher risk). Even stock markets (higher risk) nearly always yield positive returns when investments are kept in those markets for more than 3 or 5 years.

Think of your investment terms as a dynamic concept

You should regularly rethink (at least twice a year) your investment goals and their respective terms. The concept of an investment term is not static - it becomes shorter as we approach the maturity date.
When an investment starts, it's important to analyse the probability of loss on your invested capital (the principal). As the maturity date closes in, it's important to take into account, not only your invested capital but also the preservation of the amounts you've already earned with your investment.

Understand the concept of preserving capital in the long term

A logic of permanent preservation of capital will lead you to invest your capital in assets with no risk, which means low returns. However, an understanding that in the long term high-risk assets yield higher returns (despite large short-term oscillations) means that the preservation of invested capital (be it principal or profits) only becomes truly important as the date you want to use those amounts approaches. So you should gradually reduce the tranches you invest in higher-risk assets in the last 3 to 5 years of its term.

Consider the investment frequency

Another variable that can really affect what sort of assets you include in your portfolio is how regular your investments are.

Regular savings, steady or rising

Investors who are financially capable of saving on a regular basis, in similar or rising amounts, and who do not need to set that amount aside for a rainy day, can more easily invest their money in higher-risk assets. In this case, preserving capital is not as significant, since the invested amounts are not as crucial for normal financial needs when there is a surplus. Regular savings means higher-risk assets enjoy more stable average costs and that you can take better advantage of dropping prices in financial market cycles.

Irregular or occasional savings

If your capacity to invest only allows for irregular or just occasional savings, then the risk of preserving capital is a big problem, since you may need to resort to your savings to meet day-to-day expenses. It's important that you build an 'Emergency fund' for these cases. You should invest this portion of your resources in low-risk assets. You should invest remaining amounts in accordance with your goals, investment horizon and risk profile.

The 'Emergency fund'

This portion of your assets is crucial to investors who cannot, on a regular basis, free up surplus amounts from their day-to-day household expenses. But it is also important for other investors. When most investments follow a certain strategy, it's useful to have a sum set aside to tackle unforeseen expenses without having to change the nature of your long-term investments.

Think of how much risk you want to bear

An investment risk is related to the level of uncertainty of its final result. Not all investors have the same risk profile.

Short-term risk

Savings account pose, both in the short and long term, zero investment risk since the invested capital does not change during the term and you get to know the final result of your rate of return when you open the account. Bond funds, for instance, offer low risk and low probability of capital loss. However, the final result may change, and there does begin to be a certain risk factor. A fund of funds with a balanced portfolio (less than 50% shares) offers higher returns, but already poses a risk of loss of principal. Share funds offer even more attractive capital gains, but in the short term pose a high risk of loss of principal.

Long-term risk

A long-term risk analysis is very different from a short-term one. The odds of losing money invested in the long term - even in the case of higher-risk assets such as shares or share funds - is potentially lower. The risk level of a given investment can drop as the investment term increases, provided the portfolio is duly diversified.  

In a nutshell

To talk of returns versus risk one needs to understand two basic principles:

  • in the long term, more risk means greater likelihood of higher returns (for a properly diversified portfolio);
  • in the short term, more risk means greater likelihood of loss of your invested capital.

Consider the different alternatives

Investing in the short term

Investing with short-term goals means focusing on preserving the invested capital. In this case, you'll have to invest mostly in low-risk assets. If you invest in risky assets with short-term goals in mind, there's a high probability of loss of capital.

Investing in the medium term

If you have medium-term goals you may invest in higher-risk assets, which may yield higher returns. The percentage of shares in your portfolio is related with your investment term. Shares shouldn't exceed 15% to 20% for investments that are just over a year. For investments closer to the 5-year mark, shares can go up to 70% to 80% of your portfolio, depending on your investment profile.

Investing in the long term

Money-market funds can incorporate medium and long-term portfolios in small amounts (5%), as cash reserves for good investment opportunities.

Funds of funds

Funds of funds are diversified instruments that have to be chosen according to their composition. More aggressive ones for long-term and more balanced ones for medium-term investments.

Diversify your portfolio

Individual assets vs. diversified portfolio risk

The idea that 'long-term risk generates potentially higher returns' tends to apply to diversified portfolios, not to individual securities. Whereas diversified portfolios tend to follow market trends, individual securities tend to follow (and can suffer from) whatsoever circumstances affect the respective companies.

Collect information, Assess and Build your Investments

Some options investors may choose from:

  • Diversifying with individual securities
    For a portfolio to be completely diversified in relation to a given market, it should include roughly 15 to 20 securities from that market. From that number up, including new securities will not forcibly add significant value to your portfolio. If that is the case, investors may select the most promising and solid titles and monitor their performance, reallocating their portfolio if necessary.
  • Diversifying with Certificates
    A portfolio made of certificates is an opportunity to have a simple and transparent footing in the stock and goods markets (provided the certificates are trustworthy representations of the underlying asset). This way you can enjoy the diversification offered by investing in stock market indices and goods. This product, among other things, is simple to transact, the issuer offers guaranteed liquidity, and has a transparent performance when the underlying asset is replicated in a passive manner.
  • Disclaimer
    Certificates are complex financial products that are subject to price fluctuation and stock market risks. Potential investors should have previous experience investing in the stock market and must be aware that capital markets are volatile. This information does not exclude the reading of the trading application forms and technical notes available at, the issuer's head office, Euronext Lisbon or
  • Diversifying with Investment Funds
    Investment funds tend to be an efficient way of building diversified asset portfolios. Fund managers prepare a selection, giving investors the possibility to access funds that specialise in different markets and build portfolios with highly diversified investments in securities and markets.
  • Diversifying with funds of funds
    By resorting to funds of funds, investors are able to build very diversified portfolios, sorted by type of financial instruments, markets or individual securities. A fund of funds is a portfolio of individual funds. As such, in order to choose one, investors will need to compare the goal they envision for their portfolio with the types of investment the fund of funds portfolio offers.

Building a portfolio

Try to assess each goal as an individual investment

Rethink your goals and analyse each one of them, preferably taking into account the following criteria:

  • Set your strategies
    Each goal should have a specific strategy. Write it down and try to keep to it the best you can.
  • Try to invest regularly
    Being disciplined about your investments is one of the ways to reach your goals. Try to be disciplined with your savings. Decide on the amount you need to invest in order to fulfil each goal. Make regular and stable investment plans.
  • Track your investments
    Review how your investments are going from time to time (every quarter or semester). Try to analyse how each investment is doing by comparing them to your goals, and readjust your portfolio or the amounts established for each goal if need be. Don't forget to protect your capital when you're approaching your goal.
  • Try to stay on top of the macroeconomic situation.
    Don't chase after big deals and apparent market opportunities. Stable investments, based on strategic allocations, tend to get better results. Strategies based on the continuous buying and selling of securities, following market fashions, tend to destroy value and as a rule involve very high risks. tools

So that our clients don't miss out on any investment opportunity, offers a set of investor support tools:

  • You can find all the relevant information on Financial Markets with multimedia content, on our Markets webpage on a daily basis;
  • Tools and apps to help you invest in the Stock Exchange with maximum security:
    - MTrader
    - Stock Exchange Alerts: Quotes and Stock Exchange order status alerts, sent via text message or email.
    - MobileBanking
  • Free access to the Dow Jones Morning Briefing, where you can consult a summary of what's going on in the various markets;
  • Stop Orders
  • Funds of International Investment Management Companies
  • Essential investment news, free and in real time, from Dow Jones;
  • Investment Newsletter (weekly);

Practical Investment Rules

Value of a Share

The value of a share can be defined in a number of ways, some in a reasonably objective, and others in a quite subjective, manner. Calculations based on formal (e.g. stockholders' equity) or accounting variables (e.g. book net worth) are rigorous.

Calculations based on market variables, which continually fluctuate and always depend on judgments made by investors and markets (i.e. quotes, the prices that  shares are bought and sold at), are more subjective and their validity must be assessed by each party. Calculations made by appraisers (e.g. price targets) depend, to be credible, on whether investors, the markets and other appraisers regard them as prestigious.

Face Value of a share

This is the portion of a company's stockholders' equity each share represents. Provided all shares belong to the same category, their face (or nominal) value will be the company's stockholders' equity divided by the number of shares issued. This is merely a formal amount and doesn't reflect on the company's appraisal. In certain countries (for example, in the USA), shares have no face value because it is deemed unnecessary.

Book Value of a share

This is the portion of the book equity capital (net book worth, i.e. the difference between assets and liabilities in a company's accounting records) represented by one share. It is calculated by dividing the value of the equity capital by the number of shares issued.

This calculation is not very rigorous when the company has different classes of non-fungible shares (i.e. with different rights). The share's book value, although more important than its nominal value, is not very significant when it comes to appraising a company.

Market value of a share

This is the value at which the shares are traded on the Stock Exchange. If the market is efficient, the share's market value is the best appraisal of the company, at a given time. A share's market value reflects the investors' expectations regarding the future development of the company issuing the share.

A number of factors affect these expectations, namely:

  • expected gains (especially for short-term investors);
  • expected dividends (the higher the expected dividend the more attractive the share);
  • business uncertainty, which depends on company and sector risk, as well as of the overall economic environment;
  • business potential, which depends on management quality and its sector's potential for growth, among other things;
  • earnings from alternative investments, such as investments in deposits or public debt that affect the level of return investors demand for placing their money in risky instruments.

Earnings from shares

Earnings from investing in shares

Investments in shares produce several types of earnings, the most important being dividends and capital gains. Since these sources of income depend on companies' past (distribution of dividends) and future results (capital gains), investing in shares always involves a certain amount of risk, which manifests itself in the uncertainty of profit or loss.


Dividends represent the part of the company's profit that is distributed among its shareholders. Once the Profit and Loss account is known, a General Meeting is held to approve the Board's Annual Report and its proposal of how to invest the results and distribute the dividends (if there has been a profit). Dividends may be ordinary or extraordinary, paid out in cash or in products, or a purchase of own shares (value reverts to the shareholders who sell them).

If we divide the distributed dividend by the quoted price for the shares, we get a very simple ratio called 'dividend yield'. It represents the return rate of the investment in shares for the period the dividends pertain to, if the quoted price for the shares did not change.

Capital Gains (or Losses)

Capital gains are the difference between the offer and bid price of a share. You'll make a capital gain if the difference is positive (profit) and a capital loss if negative.

Capital gains or losses are potential when the security is not actually sold but its face value is only compared to its current market value. Capital gains are gross if you only compare the prices, and net if from this value you subtract transaction costs.

Non-cash benefits of shares

On top of cash benefits (dividends and capital gains) , shares also offer other benefits, namely the right to vote at the general meeting, right to participate in company management and a pre-emption right on the issue of new shares, among other benefits shareholders may chose to include in the company's Articles of Association.

Yield of an investment in shares

You can calculate the return of an investment in shares by dividing the sum of dividends received and capital gains/losses by the purchase price.

Yield = (Capital gains (or losses) + Dividends) / Purchase price

New shares issue

Capital increase

When public limited companies want to increase their capital, they issue new shares and sell them on the primary market. These issues are private if a small number of investors subscribe them, and public if open to a large and undifferentiated number of investors.

Companies that launch public share issues are called public limited companies. When there is a new shares issue, there is an increase in the company's Shareholders' Equity account.

Scrip issue

There are ways to increase a company's share capital without having any money enter the company. This is basically a bookkeeping exercise where accounts are reorganised (capitalization of retained earnings) or creditors transformed into  shareholders (capital increase by conversion of convertible bonds or capital increase by transforming credit into capital).

In these cases the company's value is not increased, although there is a fiscal effect that could be negative in the case of transforming credit.

New shares issue (with entry of money or other values)

Normally when a company increases its share capital it wants to harness the means to finance its own growth and as such requires that a certain price be paid for the shares it sells on the primary market. Less frequently, a company will issue new shares that are traded for assets, such as buildings and materials that increase the company's means of production.  Such operations are similar to company mergers, where one company is incorporated into another.

A capital increase by new shares issued with the aim of distributing dividends to company shareholders - not in cash but in shares - is similar to a financial gain in the sense that the value of the dividends is to all effects retained in the company.

Calculating the value of shares after a new shares issue:

The theoretical value of a share, after a capital increase by cash inflow, is the sum of the company's current value (no. of shares times its price) and the expected value of the cash inflow (no. of shares to issue times subscription price of a share), all divided by the total number of shares after the capital increase.

Regardless of the subscription price of a share, a shareholder that maintains the same percentage of ownership interests in the company's capital, before and after the capital increase, will make no extraordinary gains nor losses from the operation. If the subscription price is lower than the price on issue date, it is in the shareholders' interest to subscribe more shares than those they currently hold in the company's share capital.

Subscription rights

When a company wants to increases its capital, it can also offer a rights issue whereby the current shareholders have the first right to buy these preferential shares (or in some cases, even the whole issue). This right is called Subscription Right and can be traded on the stock exchange if the shares are traded there.

When a rights issue is announced, information on when the last trading session with subscription rights and the first session without subscription rights will take place is also provided.

These subscription rights can be exercised to subscribe new shares in compliance with the issue terms and can be sold on the stock exchange while the rights are being traded. When sold, the ownership interests are transferred.

Shareholders who do not exercise their subscription rights will find the value of their holdings reduced in the same proportion as their rights value. If some shares have not been offered in the rights issue, the left-over shares can be allotted to shareholders who, exercising their rights, wish to apply for a portion of these shares.

Theoretical Value of Subscription Right =(Value of share in market - Subscription price) x Attribution factor

Bonus issue

When capital is increased by capitalizing retained earnings, shareholders are granted a right that allows them to receive new shares for free pro rata (in the same proportion as their previous holdings).

Bonus issue rights can be traded on the same stock exchange the respective bonus shares are traded on. When a bonus issue is announced, shareholders are also informed of when the last stock exchange session for trading these rights will take place, as well as of the first session when the traded shares will no longer include these rights.

Theoretical Value of Bonus issue rights = Theoretical Value of share / No. rights required to subscribe a share

Effects of splits and dividends

Share splits

Splits divide the face value of shares by increasing the quantity of shares representing the company's share capital. For example, in Portugal most companies divided the face value of their shares from 1,000$00 to 1 Euro, whereby an investor who had held one share from that time on held roughly 5 shares.

Shareholders do not inject any money into the company in a share split. It is merely an accounting operation where the face value of the shares is reduced. The company maintains the same share capital, only fractioned into a larger number of shares.

Effects of splits in quoted price of shares

Since no value is added in a share split, theoretically there shouldn't be any real impact on the quoted price of shares. However, history shows that after a security starts to trade on its new face value, it may not be exactly adjusted to the proportion of the split, and as such there may be a slight addition of value on behalf of the shareholders.

Normally this effect is explained as ensuing from a number of causes, such as an increase in liquidity or market capitalisation, or even the psychological effect in investors, who now perceive the share as being 'cheap', and therefore more attractive.

Dividend payments and quoted prices of shares

Dividends are the portion of company profits that are distributed to each shareholder, once the accounts for the financial year have been approved at a General Meeting and provided there are enough profits to pay out. When dividends are paid, in theory the quoted price should fall by the same value that is paid out as a dividend.

However, in practice this adjustment is nearly always partial, and in effect the quoted price rises. Even though these variations on the dividend payment date can be explained by a wide variety of events and data, it is generally agreed upon that there may be a positive effect on the quoted price.

Investing in the short term

Short-term investment goals

As a general rule, short-term investments are expected to last up to a year. The goal of a short-term investment is established for a reduced time span.

There are usually three main reasons for investing in the short term:

  • to hedge short-term risk
  • to finance upcoming expenses
  • or to speculate on prices and volatilities

Investing in the short term to hedge risk

Some types of short-term investments act as a risk-hedging mechanism for that same time span.

For example, if you know you need to make a payment in a foreign currency within a month or two, you can invest in that debt by repaying it now and thus neutralise the exchange-rate risk till the repayment date. Likewise, if you hold certain company shares you want to sell, but can only do so (for whatever reason) in a month's time, you can sell futures on that security now, thus neutralising the price risk of holding them.

This form of investment aims to reduce asset portfolio liability and risk.

Investing in the short term to finance expenses

Sometimes we have momentary access to money that has to be used to pay for a liability in the short term. For example, you sell a house and have to pay for the new house within two months. In these situations, the goal of preserving capital will carry the most significant weight in your investment choice and only instruments of very low or no risk will be considered. Term deposits and variable-rate money-market funds or bond funds are good choices in such situations.

Only funds that do not ask for subscription or surrender fees within that time period should be taken into account.

Investing in the short term to speculate on prices

This is one of the riskiest ways of investing. Instruments that bear a significant price risk, such as  shares, futures and options, are chosen by investors who wish to invest in the short term to try to earn high return rates in a short amount of time. Studies show that in general it's very difficult to outperform the markets in a sustainable manner, so this kind of strategy rarely pays off.

In the short-term, market prices rise and drop, sometimes with high variations, creating many opportunities for profit. But investors have no way of knowing, in a sustainable manner and in the context of efficient markets, about these price variations beforehand. So making short-term investments is very risky business.

Investing in the long term

Long-term investment goals

Most investors and investments have long-term goals, i.e. more than three years. Related investments are those aimed at building, for example, additional retirement savings, inheritance plans, a nest-egg for your children's university studies, etc.

Choosing the best assets for a long-term investment always depends on both the investor's and the investment's risk profiles. We must, however, keep in mind that the risk of financial instruments is not constant - it varies depending on the investment horizon.

Long-term vs. short-term risk

In a short-term perspective, shares have a high risk due to fluctuating shares prices, which can lead to investment losses. Nonetheless, the history of financial markets shows that, in the long term, investing in shares rarely means that investors suffer negative returns.

Investing in shares in efficient and more developed markets for periods of over 5 years usually means low capital devaluation odds and high returns. In general, investing in shares (in a diversified portfolio) has a very high short-term risk and a relatively low long-term risk (over 5 years).

Long-term investment and profit

The general rule is that more risk means higher returns. This is true for the following principles: that we're talking of expected results, of portfolios of securities and not of individual securities, and in the context of developed and efficient markets.

Investing in the long-term in individual securities or diversified portfolios

The above-mentioned rules of thumb apply to diversified security portfolios, such as stock exchange indices and investment funds - not to individual securities. The performance of diversified share portfolios tends to follow the performance of the market itself, which in turn tends to follow that of the economy it operates in.

An individual security depends on the growth of its company and the specific factors that limit it. The market is clearly one of those factors, but there are others, internal to the company, that may supercede it. For example, a diversified portfolio of Portuguese shares will supposedly follow the evolution of the Portuguese stock exchange index. In turn, the latter will also follow, in the long term, the evolution of the Portuguese economy. Well, it's not unlikely that even in such a scenario, a certain company's shares might completely drop in value or even go bankrupt as a result of purely internal factors (a fire, outdated products, etc.).

In summary, as a rule we should always invest directly in a security portfolio (or through investment funds) to hedge market risk.

Build a defensive share portfolio

Defensive stocks

Defensive stocks are shares that offer less risk than the overall market risk. These shares are less volatile than the market, which is represented by an index. In quantative terms, the Beta index of defensive stocks is under the unit (the Beta index measures market risk of securities, and the market has a Beta index of 1).

Defensive stocks are usually shares of companies that operate in business sectors with little fluctuation (on account of the nature of those sectors' political and economic cycles and decisions).

These are usually business sectors related with the supply or service provision of basic services (utilities), or in mature phases of their business cycle.

Investing in defensive stocks

Investing in defensive stocks is a strategy that aims at a smaller risk premium than that of the market in general. On the other hand, it will be less exposed to risk and share price fluctuations.

Basic Concepts

Structure of Capital Markets

Capital Markets
Are composed of the Primary and Secondary Market.

Primary Market
Where new securities are issued and subscribed.

Secondary Market
Where the securities issued on the primary market are later traded (physically or electronically), normally a Stock Exchange. It is here that all shares, bonds and other securities are traded. Its function is to guarantee that issued securities are liquid and to portray their correct value. It's the segment of the financial market where financial products that already exist are traded.

Special Markets
Special Markets were created to trade bonds and other securities or to carry out other specific types of operations. Presently in Portugal only MEOG (Special Market for Block Trading of Bonds) is regulated. Here is where institutional investors operate.

OTC Market
At an over-the-counter market you can buy and sell all the securities that trade outside the stock exchange. So it is sometimes also called the unofficial market.

Regular Stock Exchange Session
During a regular session at a stock exchange quoted securities are traded. The stock market is open for regular sessions every working day.

Special Stock Exchange Sessions
Special stock market sessions are mostly set up to trade securities that can't be traded on any stock market, either because of their volume or because they have to be traded in a special way, as in the case of a public offering of shares, takeover bid or a public exchange offer. They only occur from time to time, when an operation requires a special session.

Listed Securities Market
This is the stock market segment where all shares and other securities are traded continuously. This is the most demanding market, with tough admission criteria, namely regarding the dimension of listed companies, levels of information and distribution of shares.

Second-tier Market
The second-tier market is where securities that don't comply with all the requirements of a listed market are traded. Here, listing requirements are less stringent in terms of the dimension of listed companies, levels of information and distribution of shares.  

Unlisted Market
This market is where unlisted securities (that don't meet the criteria to be admitted on the other markets) are traded. These securities may be admitted for trading during a limited or unlimited time. Prices in this market are not called quotes because they don't represent an effective market but just one-time transactions.

How the Stock Exchange works

Stock Orders

Clients issue orders to buy and sell securities that are executed by brokers at the stock exchange. These orders are called stock orders. A stock order is a mandate for buying and selling any security on a stock market.

Who executes stock orders

Stock orders can be issued to financial intermediaries, market markers and broking companies before or during stock exchange sessions. However, only market makers and broking companies can operate directly on the stock exchange. They execute orders issued directly by their clients, or by banks.

Stock Indices

Stock exchange indices are portfolios that are structured to reflect the evolution of a certain market, or part of it. For example, a market's broad-based index would be the equivalent of a portfolio containing all the securities in that market. So how this index behaves represents the market's behaviour, or (as it is sometimes said) market portfolio performance.

PSI 20 Index
This index is made up of the twenty most liquid and most representative shares traded on the Lisbon Listed Securities Market. Its portfolio composition is reviewed every semester. Calculation of this index doesn't take the payment of dividends into account. Its yield is linked only to the evolution of the securities' prices. This index was created by the Oporto Derivatives Exchange to serve as a support asset (or underlying asset) to the trading of derivatives (futures and options).

BVL 30 Index
This BVL index ('Bolsa de Valores de Lisboa' is the Lisbon Stock Exchange) is composed of the 30 shares admitted to the Lisbon Listed Securities Market most representative of liquidity, market cap and distribution of capital. Its portfolio composition is reviewed every quarter. This index includes the total yield of the securities, in the sense that it also takes the payment of dividends into account.

This index is composed of all the shares admitted to the Lisbon Listed Securities Market that present acceptable liquidity/distribution levels. It's also a total yield index.

Sectoral BVL Indices
These are calculated by breaking down the BVL General index portfolio into the different sectors the companies operate in. There are several sectoral indices, which represent the different sectors where shares are traded on the Lisbon Stock Exchange.

Dow Jones Industrial Average
This is the oldest shares index still in use. It measures the performance of the US financial markets. The 30 shares currently included in the DOW are listed on the NYSE (New York Stock Exchange), except for Microsoft and Intel, which are listed on Nasdaq. These securities represent the top US companies. In all rigour, the Dow Jones is not an index but a price average.

SP 500 Index
This index measures the overall performance of the US stock market by looking at the 500 shares that represent the main industries.

NASDAQ Indices
These are composed of securities of technology companies listed on the Nasdaq electronic market. There are several Nasdaq indices representing different security portfolios (Nasdaq 100, Nasdaq Composite, and different sectors). 

DAX 30 Index
Composed of 30 shares of the top German companies.

FTSE 100 Index
Composed of 100 shares of the companies with the highest market cap on the London Stock Exchange.

IBEX 35 Index
Composed of the 35 most traded shares on the Spanish stock market.

CAC 40 Index
Composed of 40 shares representing the top French companies.

Types of Indices
We can classify Indices using the following criteria: 1. geometric or arithmetic, depending on the type of average used to calculate the average share prices of an index 2. weighted (BVL) or unweighted, depending on whether the base reference is a Laspeyres or a Paasche index 3. prices (PSI 20) or yield (BVL 30), depending on how dividends are processed 4. total or partial, following different criteria: one can calculate sectoral indices (BVL Sectors), only for privately-owned companies,  5. Portuguese or international, depending on whether they include only one country (PSI 20) or a region or economic space (Euro Stoxx 50)

Types of Stock Orders

Regular Orders
These are the most common orders, which indicate how many securities you want to trade and at what price.

All or Nothing Orders
Orders that are cancelled or not executed if the total quantity of the buy or sell offer isn't met.

Minimum Orders
There must be a minimum quantity of securities for execution.

Basket Orders
Automatic issue of a set of orders.

Stop Orders
With buy stop orders, the investor immediately buys when the share price reaches or rises above the set limit price. With sell stop orders, the investor immediately sells when the share price reaches or drops below the limit price. When that price is reached, a stop order becomes a regular limit order or an order at any price, depending on whether a second price limit has been set.

Limit Orders
Orders where the investor sets the price at which the order is to be executed.

Market Orders
Orders the investor wants to assure are carried out and so does not set a price. The order is carried out at the best price on the market at that time. This type of order can give rise to heavy losses in times of high volatility in the stock exchange, since one cannot foresee at which price the orders will be executed.

Last-traded Price orders
Orders the investor wants to execute at the same price as the last trade.

Orders at bid price
Orders where the investor wants the order to be executed at the best bid price.

Orders at offer price
Orders where the investor wants the order to be executed at the best offer price.

Order expiration
When a stock order is issued, it can be valid only for the duration of that day's session, till the end of the current month unless cancelled before, or for a non-standard length of time (i.e. up to a date set by the investor, within a maximum of 30 days).

Physical and Cash Settlement

The concepts of physical and cash settlement

Settlement follows a trade, and can be divided into: Physical Settlement, when the seller delivers the securities to the buyer, and Cash Settlement, when the buyer pays the seller the agreed sum. Over time, securities have become increasingly dematerialised, and ever since securities have become a part of the Portuguese Central Securities Depository for BVL transactions, the period of time between these two moments of settlement has decreased. Settlement is executed by the Central Securities Depository (CVM - 'Central de Valores Mobiliários'), which is run by Interbolsa.

Settlement periods for stock exchange operations

The period for physical delivery and cash settlement is 2 working days after the trading day. The securities or the money is only available after this period. However, you can day trade, that is, buy and sell securities within the same day, since settlement will only occur after 2 working days. Cash settlements are executed by CVM and the Bank of Portugal to compensate the financial positions of brokers and financial intermediaries. Physical settlement occurs after CVM has verified the trade and the accounts of the brokers and financial intermediaries, i.e. the 2nd working day after the trading day.

Share repurchase

If the sold securities aren't available by the physical settlement date, the seller will have to repurchase the shares at the current market price to deliver them to the buyer.

The concept of Securities


Securities are (besides others recognised by law):

  • i) Shares,
  • ii) Bonds,
  • iii) Equities,
  • iv) units in funds,
  • v) subscription rights, right to buy or sell the aforementioned securities, provided the rights have been detached,
  • vi) rights detached from the securities described above in i) to iv), provided that detachment applies to the entire issue or series or is envisioned in the terms of issue.

According to Portuguese Securities Market Commission regulations or, in the case of monetary securities by notification of the Bank of Portugal, other documents representing similar juridical situations may be acknowledged as securities if these aim, directly or indirectly, to finance state or privately-owned entities and are publicly issued under circumstances that guarantee the interests of potential buyers.

Securities that may be traded on the Stock Exchange

The following securities may be traded:

  • Portuguese and foreign public funds,
  • Shares and Bonds, including Cash bonds, issued by companies or other Portuguese or foreign entities,
  • Equity Instruments,
  • Other securities that are legally admitted for trade (units in closed-end funds) and
  • detached rights to the economic content of abovementioned securities or derivatives thereof that may be autonomously traded.

Broad concept of securities

Includes monetary securities (e.g. commercial paper) and securities expressly included in the MVM Code ('Mercado de Valores Mobiliários' / Transferable Securities Code). 

Narrow concept of securities

A security as established in the MVM Code.

Representation of securities

Securities may be incorporated in physical securities (documents of title) or be represented by book entry (uncertified securities). The Transferable Securities Code acknowledges and grants the right for documents of title and uncertified securities to coexist.

Fungible securities

Securities considered identical and therefore interchangeable with others of the same type. Fungibility is an essential requirement for trading securities in organised markets.