Composite definition SSE


What is the SSE compound?

The SSE Composite, short for Shanghai Stock Exchange Composite Index, is a stock market composite made up of all A and B shares listed on the Shanghai Stock Exchange (SSE).

The index is calculated using a base period of 100. The first reporting day was July 15, 1991.

key findings

  • The SSE Composite is a benchmark market capitalization weighted equity index composed of A and B shares on the Shanghai Stock Exchange.
  • The Shanghai Stock Exchange (SSE) is the largest stock exchange in mainland China.
  • Much of the total market capitalization of the ESS is made up of formerly state-owned companies, such as major commercial banks and insurance companies.

Calculation of the composite value SSE

The composite figure can be calculated using the formula:

Current index

=

Market capitalization of composite members

Base period

×

Base value

text {Current index} = frac { text {Market capitalization of composite members}} { text {Base period}} times text {Base value}

Current index=Base periodMarket capitalization of composite members×Base value

Understand the SSE compound

The SSE Composite is a good way to get a broad overview of the performance of companies listed on the Shanghai Stock Exchange. The more selective indices, such as the SSE 50 index and the SSE 180 index, show the market leaders by market capitalization.

With a population of over 1.4 billion and a growth rate over the past two decades that saw the country climb eight spots to second in the world in terms of GDP, China is an economic force. However, the volatility of the country’s stock market has highlighted that while China is a global power, it has not ended its growing pains.

Volatility in the SSE compound

The SSE Composite is notoriously volatile. For example, between November 2014 and June 2015, the SSE Composite soared more than 150% as state media talked about Chinese stocks and encouraged inexperienced investors to buy them. Then, in the three months after that peak, the index lost more than 40% of its value. The companies suspended trading, short selling was essentially prohibited, and the government stepped in to support the market.

One of the most important factors in this stock market correction was China’s lack of experience in handling a stock market. The US stock market, for example, has learned from previous market dips and corrections. Although far from perfect, the various exchanges have methods of slowing down the market to allow trading during falling prices while subtly pressing against outright panic which can be disastrous.

These include circuit breakers that trip when the market sinks too fast. At the time, China only had one mechanism whereby a company could suspend trading for an indefinite period of time worked out between the company and the regulator. The stock market circuit breakers on the New York Stock Exchange (NYSE), by contrast, are not company specific and are designed to allow investors to catch their collective breath through temporary stops. (There are situations where the NYSE suspends trading on a particular stock, but these are definite situations.)

This lack of a defined fail-safe market in China led to an ad hoc approach to any government decision. And that left the door open for cutting interest rates, threats to arrest sellers, strategic business suspensions, and instructions for state-owned companies to start buying.

Special Considerations

Another factor contributing to the volatility of the SSE Composite and Chinese stocks in general is the lack of stock market players. China’s stock market is relatively new and is made up mostly of people. In most mature equity markets, most buyers and sellers are actually institutions, when measured by volume. These big players have risk tolerances that are very different from the individual investor. Institutional buyers, particularly hedge funds, play an important role in maintaining liquidity in the market and shifting risk to entities that can normally handle it. Even with such great players, things can go wrong, and they often do. That said, a market dominated by individual investors, particularly large numbers of individual investors who trade on margin, is prone to seeing overreactions on the way up and down.

The role of the Chinese government is intertwined with the maturity issues facing the Chinese stock market. Government intervention in the stock market is nothing new, but the enthusiasm with which the Chinese government jumped onto the market worried many. Most countries postpone intervention until it is clear that a systemic collapse is inevitable. However, the Chinese government felt the need to intervene strongly in 2015, perhaps because its political decisions helped build the bubble in the first place. This also set a practical precedent for future market events, undermining free market forces. The potential result, a Chinese stock market that is highly regulated to suit government purposes, is a less attractive market for international investors.

China’s failed experiment with circuit breakers

While the SSE Composite regained some ground between the end of September and the end of December 2015, the index declined sharply towards 2016. On January 4, 2016, the Chinese government installed a new circuit breaker in an attempt to add stability to the market avoiding big falls like those suffered by the SSE Composite in 2015.

Also known as a trading curb, circuit breakers have been implemented in equity markets and other asset markets around the world. The intent of a circuit breaker is to stop the trading of a security or market to prevent fear and panic selling from collapsing prices too quickly and without a fundamental basis, causing more panic selling in the process. After a big drop, a market can pause for several minutes or hours, and then resume trading once investors and analysts have had some time to digest the price movements and can perceive the selloff as a buying opportunity. . The goal is to avoid a free fall and balance buyers and sellers during the suspension period. If the markets continue to fall, a second breakout can trigger a high for the remainder of the trading day. When a disruption occurs, trading of associated derivative contracts, such as futures and options, is also suspended.

Circuit breakers were first conceived after the stock market crash of October 19, 1987, also known as Black Monday, when the Dow Jones Industrial Average lost nearly 22% of its value in a single day, or half a trillion Dollars. They were first implemented in the United States in 1988 and were initially based on a drop in absolute points, rather than a percentage drop. That was changed in the updated rules that went into effect in 1996 and then 1997. In 2008, the Securities and Exchange Commission (SEC) enforced Rule 48, which allows securities to be stopped and opened faster than a circuit breaker would allow under certain circumstances before the opening bell.

In the United States, for example, if the Dow Jones falls 10%, the NYSE can halt market operations for up to an hour. The size of a drop is a measurement that will determine the duration of the stop. The greater the drop, the longer the interruption in operations. Other circuit breakers are in place for 20% and 30% drops in a single day. Similar breakout factors also exist for the S&P 500 and Russell 2000 indices, and for many exchange-traded funds (ETFs). Global markets have also put in place restrictions.

The purpose of a circuit breaker is to prevent panic selling and restore stability between buyers and sellers in a market. Circuit breakers have been used multiple times since their implementation, and they were crucial in stopping a complete free fall of the market after the burst of the dot-com bubble and the collapse of Lehman Brothers. Markets continued to fall after those events, but the sell-off was much more orderly than it could have been otherwise. However, the situation with the circuit breakers in China was very different.

Circuit breakers enacted by the Chinese government on January 4, 2016 stated that if the benchmark CSI 300 index, which is made up of 300 A-share stocks listed on the Shanghai or Shenzhen stock exchanges, falls 5% by a day, trading would stop for 15 minutes. A 7% drop would cause a trading interruption for the remainder of the trading day.

That same day, the index fell 7% in the early afternoon and the circuit breaker tripped. Two days later, on January 8, 2016, the index fell more than 7% in the first 29 minutes of trading, triggering the circuit breaker for the second time. Chinese regulators announced that they would suspend the circuit breakers, just four days after they were installed. They said the suspension was intended to create stability in the stock markets; however, the inclusion of such circuit breakers was originally intended to maintain stability and continuity in the markets. While removing the switches entirely could mean a panic-driven price freefall that can occur unhindered, free market advocates argue that markets will take care of themselves and say that trade stops are artificial barriers to efficiency. From the market.

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