What does it mean that the Ibex 35 is trading at 11,000 points?

The Ibex 35 is sometimes used as a synonym to talk about the Spanish stock market. It is not strictly correct, because it is an index made up of 35 values ​​out of more than a hundred listed on the stock market. But it has become the main indicator to measure the behavior of the large Spanish listed companies.

Its main function is none other than to represent in real time how the companies included evolve, which must be the most liquid titles or, to simplify, those that move the most money in the market.

Its tracking is easy. The Ibex 35 is a price index, which is quoted continuously daily, so an investor can know the ups and downs it experiences. If it advances more than 15% in the year, it means nothing more than that it is now 15% above the closing levels of 2016. But what is behind those levels? What does it mean that the Ibex 35 is trading at 11,000 points?

As a starting point, the index has a base value of 3,000 points at the closing of the session on December 29, 1989. From there, its story began. Behind its value, there is a mathematical formula with various components. Among these variables are taken into account: each of the 35 companies; the number of computable shares in each company, that is, the capital that circulates freely on the stock market, excluding significant shares held by reference shareholders; the price of the titles; and the capitalization of each listed company. All this is put into a cocktail shaker, which results in an index, measured in points, which, broadly speaking, is weighted by the stock market size of the companies, adjusting to the shares that are not captive in large shareholder packages.

To finish shaping the Ibex, an additional component is added that adjusts it more precisely. This last condiment includes everything from capital increases and reductions carried out by the companies in the index, to dividends paid to shareholders, mergers and takeovers that affect those companies or exchanges of bonds for shares with instruments such as convertible debt.

These last adjustments are made to “guarantee, as far as possible and in a simple way”, that the Ibex reflects “the behavior of a portfolio made up of the same shares” which includes, according to the technical standards of Sociedad de Bolsas, a BME firm. This group company is in charge of the management and operation of the Stock Market Interconnection System (Sibe), the technical platform for contracting the Spanish stock market and where the order book resides.

Why a company enters or leaves the index

But even if an investor tries to replicate the Ibex, with a basket with the same Spanish values, he must take into account that the index is weighted, that is, that some companies have more weight than others based on capitalization. Today, the companies that can pull the Ibex 35 the most due to their size, always adjusted to the shares that circulate freely in the market, are: Banco Santander, with around 15%; Inditex, with 12%; and Telefónica, with more than 9%. The size of the listed companies, therefore, is key for the Ibex, and, although it is a necessary condition, it is not the main scale that the caretakers of the index analyze to include or exclude companies.

The main thing is liquidity, and one of the ways to measure it is with the trading volume, the money that the titles move in a specific period of six months. Here they also pay attention, for example, to the quality of that volume, whether it has been caused by significant changes in the shareholder structure or the characteristics and amount of the operations carried out. Based on this analysis, they try to ensure that the Ibex always contains the 35 most liquid shares, subjecting it to reviews in June and December, and holding two follow-up meetings in March and September, where there is also the possibility of changes. The requirement in terms of size is that the average capitalization of a security in the last six months is equivalent to at least 0.3% of the average capitalization of the Ibex in that period.

Not all indices are built like the Ibex 35. The one that serves as a great indicator in the euro zone, the EuroStoxx 50, does not take liquidity into account, but rather the size of the companies on the stock market, as well as the weight they already have in the index the sector to which it belongs. This last factor is not evaluated in any case in Spain, because it is not intended that there be sectoral diversity.

In an extraordinary and temporary way, the Ibex can include more or less companies. In November 2015, for example, it was made up of 34 values ​​after the expulsion of Abengoa due to the presentation of a pre-bankruptcy. It also happened in June of that same year, when Jazztel was excluded due to the takeover bid that Orange launched over the Spanish company. The index also included 36 companies in 2012, when DIA was incorporated without any value leaving due to the distortion in volume that caused the prohibition of bearish operations.

At all-time highs, but with dividends

The family of indices under the Ibex umbrella is very broad. Although the best known is the Ibex 35, there is also a counterpart that does include dividends. In a market like the Spanish one, in which companies reward their shareholders with high payments, there are substantial differentials. While the non-dividend index is still more than 45 percent away from recovering its record highs reached in November 2007, c. Among the varieties and functions of the Ibex, its use as an underlying in the negotiation of derivative products also stands out.