- The Market
- Variable income
- Fixed Income
The Market
1. What are the capital markets?
2. Where are Petrobras’ shares listed?
3. What is the difference between the primary and the secondary market?
4. In which indexes are Petrobras’ shares a component?
5. What is beta? And correlation?
6. What is the NYSE International 100 Index and NYSE World Leaders Index?
7. What is a broker?
8. What is the cost/brokerage fee charged on share buying and selling?
9. Do the commercial banks have brokerage houses? Can I safely trade shares through the intermediary of banks?
10. What is the CVM?
11. What is the SEC?
12. What is custody? Which is the custodial institution for the shares issued by Petrobras?
 1. What are the capital markets?
ANSWER:
The capital markets are an environment that encourages the permanent transfer of investors’ resources (private individuals or corporate entities) to publicly-held companies. The investors expect to receive a financial return in the operation. The latter, in turn use these resources to finance their operations and investments.
The more active the capital markets in a country, the stronger its economy and the more democratic is corporate administration and management. The capital markets are fundamental for the development of the companies and the country.
2. Where are Petrobras’ shares listed?
ANSWER:
In Brazil, the shares are listed on the São Paulo Stock Exchange (Bovespa); in the USA, on the New York Stock Exchange (NYSE). In July 2002, Depositary Receipts began trading on the Spanish Latibex market, representing common (XPBR) and preferred (XPBRA) shares issued by Petrobras, following CVM and Central Bank of Brazil approval.
In December 2002, the Board of Directors approved a listing of common and preferred shares on the Buenos Aires Stock Exchange (Merval).
3. What is the difference between the primary and the secondary market?
ANSWER:
When a company issues new shares in the market, it does so in the Primary Market. This is a way of raising funding for the company. Once the shares are issued, they trade on the Secondary Market. Or in other words, it is on the Secondary Market where trading is conducted between investors. On the Primary Market, trading is carried on directly between the investor and the issuing company.
4. In which indexes are Petrobras’ shares a component?
ANSWER:
On the Bovespa, Petrobras’ shares are components of the Bovespa (Ibovespa), Brasil (IBrX) and Brasil 50 (IBrX50) indexes. On the New York Stock Exchange, the Company’s ADRs are part of the NYSE International 100 Index and NYSE World Leaders Index. Petrobras also has a listing on the NYSE Energy Index through Petrobras Energia Participaciones S.A.
5. What is beta? And correlation?
ANSWER:
In the market, Beta is meant to be a measurement of risk of an asset according to the sensitivity of the asset in relation to a given index. It estimates the degree of expected oscillation of an asset or a fund in response to variations of a market index. A share is said to be more volatile than the index if the beta is larger than 1, since it oscillates relatively more than the index (for example, if the beta of a share in relation to the Ibovespa is 2, this implies that for each 1% of variation in the index, the share tends to vary 2%). If the share oscillates exactly in line with the index, then its beta is equal to 1. A positive beta and less than one imply that the share variation is less than that of the index. A negative beta means that when the market is appreciating, the share tends to fall and vice versa.
Correlation is a statistical relationship between two variables. For example, the correlation between the shares of Petrobras and the Ibovespa represents how much the variation in the shares of Petrobras is explained by the variation of the Bovespa Index. In spite of suggesting a connection between both variables, there is not necessarily a functional dependence between the two. You can arrive at the beta based on the calculation of the correlation between a share and an index and vice versa.
6. What is the NYSE International 100 Index and NYSE World Leaders Index?
ANSWER:
These are the New York Stock Exchange Indexes of which Petrobras’ ADRs are a component part. The NYSE International 100 Index includes non-US companies, leaders in their segments with shares trading on the NYSE. These companies are considered as benchmarks for market value, results, cash flow and liquidity of the shares, all elements that constitute a high degree of quality to the companies that comprise the index.
Additionally, the NYSE World Leaders Index serves as a benchmark for tracking a block of shares that represents in a single asset, the performance of 200 corporate world leaders in ten different segments covering the entire world. It is made up of a combination of the NYSE U.S. 100 Index (another index) with the NYSE International 100 Index and reflects the New York Stock Exchange’s high standards and requirements. The companies that make up the index have a market capitalization of about US$ 9.7 trillion, representing approximately 37% of the total world market capitalization.
7. What is a broker?
ANSWER:
A broker is the entity that effectively operates in the capital markets, acting as the intermediary for transactions between the investors and the stock exchanges. The broker must be duly accredited by the Central Bank, by the CVM (the Brazilian Securities and Exchange Commission) and by the stock exchanges themselves. Also termed brokerage houses, they buy and sell shares, deal in securities, manage portfolios and investment funds, underwrite shares and intermediate foreign exchange operations. These financial institutions operate physically in the stock exchanges, trading securities on an exclusive basis in the physical (open outcry) or electronic (homebroker) market of the Bovespa. Brokers are necessary for providing credibility to the system and liquidity to the securities that are being traded.
See in Bovespa’s site (*) the list of brokers authorized to operate. (Portuguese only)
8. What is the cost/brokerage fee charged on share buying and selling?
ANSWER:
Normally, a brokerage house charges a percentage of the value of each transaction to cover its services (there is a few brokerage houses that charges fixed values). The brokerage fee varies from institution to institution. It is estimated that under the homebroker scheme, the Bovespa electronic trading system, the brokerage fees are on average 20% less than via the traditional system.
9. Do the commercial banks have brokerage houses? Can I safely trade shares through the intermediary of banks?
ANSWER:
The majority of the large commercial banks have their own brokerage houses authorized to operate in the financial market. However, the regulations require that the broker is jurisdictionally separate from the bank. When “shares are bought and/or sold through the bank” in reality the investor is trading though the bank’s brokerage house. The rules, which apply to these brokers, are the same as apply to the others.
10. What is the CVM?
ANSWER:
The Brazilian Securities and Exchange Commission (CVM) is a federal autarchy that regulates, disciplines and supervises the stock exchanges and publicly held companies, equity funds and derivative markets, the underlying securities for which the CVM has regulatory responsibility. Detailed information on the Commission can be found in CVM (*).
11. What is the SEC?
ANSWER:
This is the Securities and Exchange Commission, the regulatory organ for the US capital markets. It is the body, which corresponds to the CVM in the United States. Go to the SEC’s site at the address www.sec.gov
12. What is custody? Which is the custodial institution for the shares issued by Petrobras?
ANSWER:
Custody is the safekeeping (with correlated services) of bonds, securities and financial assets, such as shares for example. The custodial institution registers the shares in the name of the purchaser, guaranteeing the latter’s property rights. There are companies, which specialize in the safekeeping of bonds or shares. In Bovespa’s case, the entity in question is the Brazilian Clearing and Custody Corporation (Companhia Brasileira de Liquidação e Custódia) - CBLC, where Petrobras’s shares are also held. This clearinghouse is responsible for holding shares and updating the relative corporate actions (dividends, stock dividends, subscription rights etc.), for furnishing the shareholders’ monthly statement, as well as providing notice of all movement through the shareholders’ account.
The Banco do Brasil SA is Petrobras’ primary custodian and has the same duties as specialized custodian companies such as the CBLC.
Variable income
1 - In Brazil, where and how are the shares negotiated? (What do I do to buy and sell the company's shares?) What is the code for Petrobras shares?
2 - What is the difference between common and a preferred stock?
3 - What is a "Homebroker"?
4 - What and how is the Petrobras standard-lot? (What is a round lot /odd lot market?)
5 - Is there a minimum or maximum share investment value?
6 - Is there some profitability assurance for my investment in Petrobras shares?
7 - What is rating and what is the Petrobras rating?
8 - How is the Petrobras share price formed?
9 - What is a "fair price"?
10 - What is a subscription and when was the last one of this type held?
11 - How do I know what my share status is?
12 - How can I change my address for mail about my shares?
13 - What is share buyback?
14 - What are dividends and interest on equity capital?
15 - What is the Petrobras payout policy?
16 - What are "exempt or immune" shareholders and how much are the dividends received by them?
17 - What should be done to receive dividends/interest? Can I receive the payments direct to my account?
18 - What does "dividend yield" mean?
19 - What is an ADR?
20 - What are an ADR-ratio and a Petrobras ratio?
21 - As a national investor, how can I invest in ADRs?
22 - What are Custodian Agent and Depositary Bank?
23 - How are ADR dividends paid and charged?
24 - Can I receive ADR dividends directly to my US account?
25 - Where do I find more information about Petrobras ADRs?
1. In Brazil, where and how are the shares negotiated? (What do I do to buy and sell the company's shares?) What is the code for Petrobras shares?
ANSWER:
In Brazil, Petrobras shares are negotiated on the São Paulo Stock Exchange (Bovespa). It is possible to negotiate shares through banks or brokers that take purchase and selling orders in Bovespa. The investor decides what he or she wants to do and may base his or her decision on analyst recommendations. The private bank segments also advise their account holders which investments are most attractive in the stock market. For information about the banks or brokerage houses registered in Bovespa, please access the home page http://www.bovespa.com.br/Corretoras.shtml. (*)
Petrobras shares are negotiated on Bovespa under PETR3 (common shares) and PETR4 (preferred shares) codes.
2. What is the difference between common and a preferred stock?
ANSWER:
Common stock (Bovespa symbol: PETR3) entitles the shareholder to participate in the company administration since its owners have voting rights. The top administration authority of the company is the Shareholders' Meeting.
The preferred share (Bovespa symbol: PETR4) does not entitle shareholders to participate in company administration since its owners do not having voting rights. On the other hand, these preferred shareholders have preference in receiving dividends and also are entitled to annual minimum dividends.
Preferred shares only have a right to vote on special occasions: when the company does not pay dividends for three years running, until the company again pays dividends, when an amendment to the preferred shareholders' rights is put to the vote and members of the Board of Directors are elected, provided that there is evidence of uninterrupted ownership of the shareholding for at least a three-month period. Preferred shareholders will be consulted when voting on relevant matters, such as in the case of a corporate split or merger.
Preferred shares cannot be converted into common shares or vice-versa. For further details about share classes and rights of each, access Petrobras Company By-Laws.
3. What is a "Homebroker"?
ANSWER:
Many banks or brokers have a page on the Internet where stock can be bought and sold directly, even with a small amount of funds. This is possible through the "Homebroker", a São Paulo Stock Exchange system that permits the investor to operate electronically. This system is fast and easy, permitting the individual to negotiate shares directly on the Bovespa floor through the Internet. It does not have a minimum investment sum and another attraction for the small investor is the brokerage fee: it is estimated that in the home broking system the average charge is 20% less than brokerage in the traditional system, where it is necessary to make a negotiation order through a broker.
For further information, access the page of the Homebroker system (*), where the banks or Bovespa brokerage houses that operate it are listed.
4. What and how is the Petrobras standard-lot? (What is a round lot /odd lot market?)
ANSWER:
A lot is a quantity of securities with identical characteristics. On the round lot market, shares are negotiated according to a standard-lot, in quantities prefixed by the stock exchange. In the odd lot market, negotiations are made involving a smaller quantity than the standard. In the case of Petrobras, the standard-lot is 100 shares.
Normally liquidity (facility to buy or sell shares) is greater in the round lot market and the spread (difference between the highest purchase offer and smallest sale offer) is greater in the odd lot market. This means that a buyer will probably pay more and take longer to do the transaction when placing his order in the odd lot market.
5. Is there a minimum or maximum share investment value?
ANSWER:
There is no minimum value or maximum limit to negotiate shares. However, costs, such as brokers' fees, may make very small investments uninteresting. It should be stressed that shares are normally negotiated in lots. The Petrobras standard lot today is 100 shares. Fractions of a lot must be negotiated on the odd lot market, where there is normally less liquidity (facility to buy or sell stock).
6. Is there some profitability assurance for my investment in Petrobras shares?
ANSWER:
There is generally no guaranteed return in the stock market when investing in shares. It is no different with Petrobras shares. There is, however, according to past data, a tendency to valorize the shares of companies whose foundations are solid and that have continuously good results and increase their long-term assets. It is worth noting that Petrobras shares are considered blue chips, that is, they are easily negotiated because they are in high demand (liquidity), which facilitates buying and selling the shares on the stock exchange.
7. What is rating and what is the Petrobras rating?
ANSWER:
Rating is an opinion about the future capacity and legal liability of an issuing party to be responsible for its commitments in relation to a specific fixed income security. Rating, therefore, assesses the probability of default by a company or country that issues a security. Moreover, long-term ratings include an assessment of monetary loss forecast in case of default.
The rating Moody's agency attributed to Petrobras' titles in foreign exchange on 03/25/2004 was Ba2, while in September 2005 it was Ba1, only one level below the investment grade (best classification in the international scale).
In addition to the rating, analysts offer recommendations about shares. For example, the recommendations in the analyses published by First Call vary on a scale from 1 to 5. Grade 1 is equal to a buy recommendation; grade 3 to a hold recommendation; and grade 5 a sell recommendation. The value of the Consensus Recommendation is the average grade between all assessments of that share published in First Call. The current value for Petrobras shares can be checked in the Consensus of analysts.
8. How is the Petrobras share price formed?
ANSWER:
The share price, as in any other share negotiated on the market, is the result of investor interaction. When buying and selling shares, a supply and demand flow is created by the financial instruments, which in turn establishes the share price. In other words, given a quantity of shares on offer, the greater the demand the higher the price (or given a quantity on demand, the greater the supply the lower the price). Buying or selling offers are based on past behavior of the share price and on long-term performance prospects of the company that issues the share.
9. What is a "fair price"?
ANSWER:
The term "fair price" has two different meanings: "fair price" may be a criterion adopted to assess what is the share price that would reflect the current economic and financial status of the company, indicating whether the share is dear (prospect of devaluation) or cheap (a sign that the share price will tend to rise). The fair price is given by dividing the estimated value of the company divided by the quantity of shares on the market, and a discount in the share price may be introduced that would reflect the market or country risk where the company operates.
The other meaning of "fair price" relates to a public offer of shares when a more sophisticated model determines the issue price of the security.
10. What is a subscription and when was the last one of this type held?
ANSWER:
A subscription, which can be public or private, is an increase in capital of a company by launching new shares (public offer). In the subscription to a particular group, only company shareholders can participate, having preference in buying these shares, in quantity proportional to what they own, which must be done at the price and by the deadline decided by the company and approved by the Securities Commission (CVM) (link to www.cvm.gov.br). This subscription right may be negotiated in Bovespa as a subscription bond, during the prefixed period. The public subscription is also open to non-shareholders of the company, but shareholders have preference in subscribing the capital increase.
The last subscriptions issued by the company were by public offer on August 10, 2000, when the federal government disposed of 179,639,300 common shares and on July 18, 2001, when 41,381,826 preferred shares were sold by BNDES; and on January 29, 2003, 9,867,000 preferred shares were issued in the share swap between BR Distribuidora and Petrobras in the former company's merger.
11. How do I know what my share status is?
ANSWER:
Banco do Brasil S.A., which is the managing agent of the Petrobras share system, sends the share status statement to the shareholder's address, when there are share transactions or dividends are paid and for the purpose of the income tax return. This is why it is fundamental that the shareholder's address information is given to any branch of Banco do Brasil. Moreover, shareholders may at any time appear at any Banco do Brasil branch and ask for a statement of their Petrobras share status.
Shareholders with shares under the custody of CBLC (*) (Brazilian Settlement and Custody Company) should consult their status in that institution with their broker.
12. How can I change my address for mail about my shares?
ANSWER:
Registration data must be updated with Banco do Brasil S.A., the depositary institution of Petrobras book entry shares. To do so just go to any branch of Banco do Brasil with your personal documents.
Shareholders with shares under the custody of CBLC (*)(Brazilian Settlement and Custody Company) should update their data in this institution with their broker.
13. What is share buyback?
ANSWER:
It is the reacquisition of shares by the issuing company. Buyback is a strategy that can be used to protect the price of shares in order to maintain the value of its shareholders' assets, which occurs when executives understand that the company shares are undervalued by the market. The shares bought back are kept in the treasury department.
In December 2002, Petrobras Board of Directors approved the policy of buying back common and preferred shares. The possibility of a share buyback was one of the innovations added to the Company By-Laws approved by the General Shareholders' Meeting on March 22, 2002. In compliance with the above basic principle and other established guidelines, the Executive Board may at any time propose to the Board of Directors specific buy back operations.
14. What are dividends and interest on equity capital?
ANSWER:
Dividends are a form of remunerating the capital invested in the company by shareholders. The value is paid in cash to the company shareholders and is a share in the profits of a fiscal year.
Interest on equity capital is another form of paying the shareholder and consists of sharing retained profits from previous years.
There is another difference between dividends and interest on equity capital with regard to income tax: paying interest on equity capital benefits the company and, consequently, its shareholders with regard to paying dividends, because the interest may be deducted from the Income Tax Provision account, increasing the net income.
15. What is the Petrobras payout policy?
ANSWER:
Pursuant to the Company By-Laws, Petrobras has mandatory minimum dividends of 25% of the adjusted clear profit. Preferred shares will have priority in the case of capital reimbursement and receipt of dividends at least of 5% (five percent) calculated on part of the capital represented by this kind of share, or 3% (three percent) of the net worth of the share - the higher always prevailing -, participating equally with the common shares in the increases in capital stock after including provisions and profits.
Preferred shares will participate on a non-cumulative basis under equal conditions with common stock in the distribution of dividends when more than the minimum percentage assured them in the previous paragraph. Moreover, the CVM Securities Commission dictates a dividend payment of 10% higher for PN shares on a preferential basis (calculated on a minimum dividend of 25% of adjusted net profits). What happens in the case of Petrobras is that the priority for receiving 5% of the capital relating to PN shares is generally more than the 10% preferred stock.
For further information access Dividend Policy and Dividends Distribution Record.
Important: In order for Petrobras shareholders to receive their rightful dividends, it is essential that they constantly update their registration data, informing any change of address or bank account for crediting dividends. This update should be made at any branch of the Banco do Brasil S.A. (if custody is by this bank) or requesting the stockbroker should the shares be under the custody of CBLC.
We also recall that, pursuant to the Corporate Act (Law 6404/76, art. 287, amended and with provisions added by Law 10,303/2001) (*), the share, in the case of dividends, lapses in three years after the date when they have been put at the disposal of the shareholder.
16. What are "exempt or immune" shareholders and how much are the dividends received by them?
ANSWER:
As defined by the Internal Revenue Service, immune and exempt shareholders are those whose remuneration does not have Withholding Income Tax discounted from it, such as Municipalities, Foundations, and other philanthropic entities (only legal entities can be exempt).
In 2004, the immune parties received R$4.7679 per share in dividends, while in 2003 this value was R$5.2849 per share.
17. What should be done to receive dividends/interest? Can I receive the payments direct to my account?
ANSWER:
Dividends / interest on equity capital is paid by Banco do Brasil S.A., the depositary institution of Petrobras book entry shares. Dividends will only be paid to shareholders whose registration data is updated or to those who have a current account in any bank registered in Banco do Brasil (institution that manages the Petrobras Book Entry Share System). Therefore, just go to any branch of Banco do Brasil or your securities broker, with your identity documents in hand.
It is possible to receive the sums directly to the account, provided that shareholders have a current account with Banco Brasil S.A and shares under custody of this Bank; or have a current account in another bank registered in their shareholder data. These shareholders have their rights automatically credited in account on the date when payment begins.
Detailed information can be obtained in Dividend Payments.
18. What does "dividend yield" mean?
ANSWER:
It is the ratio between dividends (per share) paid by a company and the current share quotation. The dividend yield measures the gain with dividends in proportion to the market yield.
The 2004 fiscal year dividend represents 4.7% and 4.3% of the ordinary and preferred share market value, respectively. In 2003, the dividend yield was 6.2% for ordinary shares and 6.8% for the preferred ones.
19. What is an ADR?
ANSWER:
An American Depositary Receipt (ADR) is a certificate issued by North American banks and represents shares of a company outside the USA. Many Brazilian companies use this instrument to negotiate their shares on the New York Stock Exchange (NYSE). The company gains visibility on the international market and may find it easier to raise funds abroad through a loan or even by issuing new shares.
In October 1996 the ADR level I American Depositary Receipt Sponsored Program was launched for Petrobras preferred shares. Later, in February 2002, an ADR level II Program substituted it and made it possible to negotiate the preferred stock on the NYSE. In July 2001, an ADR level III Program replaced the previous one, permitting new share issues on the North American market.
The Petrobras common ADR Program was launched in August 2000 already as level III.
Petrobras ADRs are negotiated on the New York Stock Exchange under the codes PBRA (preferred shares) and PBR (common shares).
For further information about ADRs, access the JPMorgan (*) page, which is the custody agent for these Petrobras securities in the USA.
20. What are an ADR-ratio and a Petrobras ratio?
ANSWER:
ADR-ratio is the number of shares represented by a single ADR. In the case of Petrobras ADRs (both common and preferred), this quotient is 1 to 2 (one ADR is represented by two share).
21. As a national investor, how can I invest in ADRs?
ANSWER:
ADRs can only be bought and sold by individual and corporate investors who have a foreign bank account. It is legal for a Brazilian citizen to open an account abroad provided that it is declared and respects the national taxation regulations. Money can only be sent abroad through financial institutions accredited for exchange transactions and if the sum is more than US$ 10,000 the Central Bank of Brazil must be informed.
22. What are Custodian Agent and Depositary Bank?
ANSWER:
A custodian agent is the institution in Brazil that registers shares on behalf of the buyer and assures ownership. In the case of Petrobras, there are two custodian agents: Banco do Brasil S.A. and Companhia Brasileira de Liquidação e Custódia (CBLC), linked to the São Paulo Stock Exchange (Bovespa).
The depositary bank at home and abroad strives for share integrity / restitution (when abroad, shares relating to an ADR Program). The Petrobras depositary in Brazil is Banco do Brasil S.A. and Citibank outside Brazil. As the depositary, JPMorgan (*) also issues the ADR, keeps the registration of the owners, registers the negotiations and the distribut dividends in dollars to the ADR holders.
23. How are ADR dividends paid and charged?
ANSWER:
The dividends are paid in dollars and are charged as share dividends of American companies. Also, fees may be charged by the governments of the country of the company's origin, which, depending on the circumstance, can be debited when paying American charges. In the case of Brazil, income tax is withheld at source, that is, the dividends leave the country already with income tax discounted.
24. Can I receive ADR dividends directly to my US account?
ANSWER:
In the USA there is a service called Direct Deposit that electronically sends the dividends direct to the appointed account on the day when dividends are paid on the North American market.
25. Where do I find more information about Petrobras ADRs?
ANSWER:
Besides the Petrobras Investor Relations site, a good source of information is the JPMorgan (*) site about ADRs, which is the depositary bank of the company shares outside Brazil.
Fixed Income
1. What is the difference between shares – variable income – and debentures, notes, promissory notes & bonds – fixed income?
2. What is commercial paper?
1. 1.What is the difference between shares – variable income – and debentures, notes, promissory notes & bonds – fixed income?
ANSWER:
Shares are nominative securities which can be traded in the financial market and comprising part of the variable income market. Shares represent a fraction of the capital stock of a company. The holders of shares are effectively partners in, and owners of part of the company. The return on the shares is linked to the evolution in the share price (capital gain), to the dividend performance and policy of the company (the shareholders receive a proportional part of the profits), and tendencies in the capital markets and the economy as a whole.
Debentures, bonds and promissory notes are credit securities, issued by the companies and representing loans. The holders of these securities are the company’s creditors and the return on these instruments is associated to their issue characteristics and to the company’s capacity to pay down its debts (this constitutes the credit risk). The promissory notes together with bonds and debentures make up the fixed income market. The principal difference in these instruments lies in the term: while the notes are used for funding working capital over a short term, bond and debentures are medium to long-term securities.
2. What is commercial paper?
ANSWER:
Commercial paper is similar to promissory notes, being short term finance instruments issued by large companies with a low level of credit risk since they are generally associated with collateral guarantees provided by the company. This instrument allows the companies to access capital at a lower cost than bank interest rates.
(*) This link leads to an address outside the Petrobras system. Petrobras accepts no responsibility whatsoever for the contents thereof, nor for the privacy policies or practices of the websites to which it provides links.
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