About the Methodology of SWS Serial Stock Indices
1. The objectives and methodology of the construction of SWS Serial Stock
Indices
1.1 The objectives of the construction of SWS Serial Stock Indices
SWS Serial Stock Indices reflect the price changes of listed stocks of the whole stock
market or of different sectors, in order to provide evaluation measures for investors to
judge the trends of the markets. On the purpose of displaying the overall changes of the
prices of stocks listed in Shanghai and Shenzhen Stock Exchanges, SWS Research Co.,
Ltd. has taken into consideration all listed companies when constructing SWS Serial Stock
Indices. We have selected 300 representative stocks on the markets as constituents to
calculate SWS 300 Index reflecting the overall changes of the prices on the markets.
Based on our SWS industry classification System, we construct SWS Sector Indices to
indicate the changes of stock prices of listed companies within different sectors. Based on
a part of indicators widely used in the analysis of stock investment, we also select
component stocks to calculate SWS Style Indices reflecting the changes of stock prices of
listed companies with different styles.
1.2 The methodology of the Construction of SWS Serial Stock Indices
We observe the following rules when constructing SWS Serial Stock Indices:
Representation. SWS Serial Stock Indices reflect the average price level of the stock
pools selected. SWS Sector Indices, which are based on the Industry Classification,
should reflect the characteristics of the price changes of listed stocks within different
industries. SWS Market Style Indices should indicate the price changes of listed stocks
with different market styles.
Investability and Replicability. We have considered practical conditions and features in
China’s securities markets when constructing SWS Sector Indices and SWS Market Style
Indices. When Constructing SWS Sector Indices, we have utilized the industry
classification of listed companies that is oriented by investment and considered the
characteristics of our securities markets and national economic operations, in order that
investors can make use of the Indices to make investment analysis, performance
evaluation and assets allocation. When constructing SWS Style Indices, we combine the
characteristics of the securities markets to divide styles according to the different
performing characteristics to provide supplementary analytical instruments for investors’
decision-making.
Consistency of approach The basic principles and the selection method of constituents
will be maintained consistent once adopted.
2. The constitution and characteristics of SWS Serial Stock Indices
2.1 The constitution of SWS Serial Stock Indices
SWS Serial Stock Indices include SWS 300 Index, SWS Sector Indices and SWS Style
Indices.
SWS 300 Index with 300 constituents is a representative Index of the markets which
reflects the overall changes of the representative companies listed in Shanghai and
Shenzhen Exchanges. SWS Sector Indices select all listed companies in Shanghai and
Shenzhen Exchanges as constituents to construct 23 sector indices based on SWS
industry classification system. SWS Style Indices are component indices calculated on
many indicators such as size, growth ability and stock price which mainly include
Equity-Scale Index Series, P/E Index Series, P/B Index Series, Earnings Index Series,
Stock Price Level Index Series, Newly-listed Stock Index, Rights Issue Stock Index, Active
Stock Index and so on.
2.2 The characteristics of SWS Serial Stock Indices
A consolidated Index series based on weighted negotiable shares of Shanghai and
Shenzhen markets. At present, although both of Shanghai and Shenzhen have their own
composite indices and component indices, they only select constituents from companies
listed in the respective market. SWS Index Series are the consolidated market indices
based on weighted negotiable shares, which address both Shanghai and Shenzhen
Markets.
To adjust the constituents periodically. In order to ensure the representation of
constituents and the accuracy of industry sectors of listed companies allocated, SWS
Serial Stock Indices make periodical adjustments of constituents. SWS 300 Index, P/E
Index Series, P/B Index Series, Equity-scale Index Series and Earnings Index Series
may be adjusted twice a year, and Price Level Index Series may be adjusted four times a
year. Analysts examine the changing conditions of listed companies and adjust
constituents of SWS Sector Indices at the beginning of every quarter.
To implement alternative constituents system. SWS 300 Index and SWS Market Style
Indices are component indices, which are calculated on constituents selected according to
certain standards. Besides periodical adjustments, temporary adjustments of constituents
may be implemented due to the following circumstances. Firstly, some stocks are de-listed
from the market due to the companies’ severe violation of regulation, loss of earnings in
recent years and so on. Secondly, due to the false information disclosure of some listed
companies, disqualified constituents may be selected into indices. Once discovered, they
would be substituted. In order to reduce the additional investment cost due to adjustments
of constituents, SWS 300 Index and SWS Market Style Indices implement the alternative
constituents system. By this way, the constituents are selected in line with that of
adjustment of Index constituents and are determined and published when constituents are
adjusted.
3. The calculation and adjustments of SWS Serial Stock Indices
3.1 The basic calculation method of SWS Serial Stock Indices
SWS Serial Stock Indices adopt Passche Index Method. Take December 30, 1999 as
base day, the base value is 1000,and calculate indices based on weighted negotiable
shares. Internal employee shares and shares held by strategic investors, which are not
fully negotiable, are taken into calculation of indices when fully negotiable.
The formula for calculating T trading day index is
It =
LVt
× I0
LV0
Of which: It is t trading day index, I0 is base day index, LV0 is the negotiable market cap of
base day, and LVt is the negotiable market cap of t trading day.
In actual calculation, using the linked method to solve the impact of non-trading factors
such as IPOs, rights issue, secondary share placement and de-listed shares on indices,
the formula is
LVt
I t = I t −1 ×
LVtAdj
−1
Of which: It is t trading day index, It-1 is t-1 trading day Index, LVt is the negotiable market
cap of t trading day, LVtAdj
−1 is adjusted negotiable market cap of t-1 trading day. on t trading
day, calculate adjusted negotiable market cap when IPOs, ex-rights, ex-dividend,
suspension of constituents and removal of constituents occur.
4. SWS 300 Index
4.1 The selection and adjustment of constituents
The selection of constituents. The first thing is to determine the index universe in which
stocks should be beyond 3-month listing period, non-ST A-shares in the Shanghai and
Shenzhen Stock Exchanges ， and their financial statements should not be given
non-qualified opinions by auditing firms illegally ， and companies have no major
compliance violation. Major compliance violation refers to the case in which listed
companies don’t release their periodical reports on time, or don’t disclose major events
immediately, or seriously embezzle companies’ capital, or make external loan guarantees
against regulation, or disclose false information, or don’t perform their duties according to
rules, or are punished by CSRC or other regulatory authorities, or are publicly condemned
by Exchanges. After deterring the index universe, we determine the constituents by taking
the negotiable market cap as a base, and considering market representation. We
calculate and score daily average negotiable market cap and daily average turnover ratio
of stocks in recent half-year respectively, get the sum of scores, rank from small to large,
and select the top 300 stocks as the initial constituents of SWS 300 Index. If ranked
abreast, determine constituents according to the priority principle of “negotiable market
cap and scale of negotiable shares”.
The adjustments of constituents. At first, according to the daily average negotiable market
cap and turnover ratio in the recent half-year (the calculation period of adjustment in July
is from January 1st to June 10th of the same year, the calculation period of adjustment in
January is from July 1st to December 10th of the past year, and the newly-listed stocks’
negotiable market cap and turnover ratio are calculated since the 6th trading day from
listing), rank the stocks based on falling sequence and give scores “n”. The previous
constituents ranked top 350 are taken as preferred constituents, but the total number is no
more than 250. Then the remaining 50 stocks are supplemented by the following rules: (1)
non-previous constituents ranked top 200 are selected as constituents according to
sequence; (2) the remaining stocks may be supplemented according to the rule of
previous constituents priority; (3) if ranked abreast, select the stocks according to the
order of “previous constituents priority, negotiable market cap priority, and negotiable
shares priority” successively.
4.2 Alternative constituents system
Exclude the following stocks: companies which are listed less than three months, or ST
stocks, or stocks which have audit report with rejection of giving opinions or have major
compliance violation in the recent year. After newly-selected constituents are excluded,
the remaining stocks are ranked comprehensively according to the adjustment of
constituents of SWS 300 Index. Then select top 30 in the composite rank as alternative
constituents. If ranked abreast, select constituents according to the priority of “previous
constituents priority, negotiable market cap priority, and scale of negotiable shares
priority ” successively.
5. The maintenance and publishing of SWS Serial Stock Indices
SWS Index Research Group and Information Center are in charge of maintenance of
SWS Serial Stock Indices. Daily maintenance and publishing of the Indices include the
following three aspects: base data maintenance, system maintenance and supervision of
Indices publishing. The base data implement the input of multi-data sources and is
checked by two persons, before 12:00pm every day, the persons responsible for base
data maintenance will seal and save the base data in database of SWS Consulting &
Research Co after the data is checked and confirmed, so as to ensure the completeness,
timeliness and accuracy of base data. The persons in charge of the supervision of Indices
publishing supervise the Indices publishing condition from the different publishing
platforms, and after trade is closed every day, they will check the daily indices indicators
and the indices calculating divisor and constituents of the next day, to prepare for the
index calculation of the next trading day. The system maintenance persons are
responsible for the steady, accurate and efficient operation of indices calculation and
publishing system. Otherwise, the Index Research Group also sets up the emergency
action mechanism to cope with sudden events, periodically convenes routine meeting to
exchange the experiences of indices maintenance and publishing so as to upgrade the
level of indices maintenance and release.