Must-know before investing in the Taiwan Stock Market Index: From understanding the Weighted Index to comprehensive trading strategies

What is the Taiwan Weighted Index? Understanding the Essence of this Key Indicator

When we talk about the Taiwan stock market, we are actually referring to the Taiwan Stock Exchange Weighted Index, commonly known as the “Taiwan Market Index” or “Weighted Index.” This index covers all common stocks listed on the Taiwan Stock Exchange and reflects the overall market performance and Taiwan’s economic condition through a composite number. Investors can use it to gauge market trends.

So, why can a single index represent the entire stock market? The key lies in its calculation method. The market index uses a weighted average of the prices of all listed stocks. To illustrate with a simple example: a grade has two classes, Class 1 with 10 students and Class 2 with 20 students. Their midterm scores are an average of 80 and 90, respectively. The overall grade average cannot be simply calculated as (80+90)÷2, because the student numbers must be considered. In reality, Class 1 represents 1/3 of the students (score 80), and Class 2 represents 2/3 (score 90). Therefore, the grade average = 1/3×80 + 2/3×90 = 86.7. This is the meaning of “weighted.”

Two Types of Weighted Calculation Methods: Price-Weighted vs Market Cap-Weighted

Major global stock markets mainly use two index calculation methods:

Price-Weighted Index was pioneered by the Dow Jones Industrial Average. Its principle is to sum the prices of all sampled stocks on a base date, setting that as 100 points. For example, if on the base date, Stock A is 450 yuan and Stock B is 550 yuan, the total is 1000 yuan, which is set as 100 points. The next day, if Stock A rises to 550 yuan and Stock B to 600 yuan, the total becomes 1150 yuan, and the index is 115 points, up 15 points. However, this method has a clear flaw: stocks with higher prices have a much greater impact on the index than lower-priced stocks, often ignoring the fluctuations of low-priced stocks.

Market Cap-Weighted Method is used by the Taiwan Market Index. It uses the market capitalization of listed companies as the basis for weighting. Market cap is calculated as: Market Cap = Stock Price × Number of Shares Issued. For example, in the market, Company A has a stock price of 150 yuan/share with 2000 shares issued, so its market cap is 300,000 yuan; Company B has a stock price of 5 yuan/share with 140,000 shares issued, so its market cap is 700,000 yuan. The total market cap of both companies is 1 million yuan, and the index is set at 100 points. One month later, Company A’s stock drops to 130 yuan/share, with a market cap of 260,000 yuan; Company B’s stock rises to 10 yuan/share, with a market cap of 1.4 million yuan; the total market cap becomes 1.66 million yuan, and the index rises to 166 points, an increase of 66 points.

Advantages and Limitations of Using the Taiwan Market Index for Investment

Advantages

The Taiwan Market Index provides a macro perspective of the entire stock market, covering all listed common stocks in Taiwan, offering a broad and comprehensive scope. It can reflect the overall market trend and current market stage effectively, making it a valuable tool for investors to grasp market dynamics.

Limitations to Recognize

1. Overly Influenced by Large Companies: Since the index uses market cap weighting, it is heavily affected by the price movements of high-cap companies. The performance of small and medium-sized stocks can be overlooked, and the strong performance of a few leading companies may mask the true situation of other enterprises.

2. Masks Significant Differences Between Stocks: The index reflects the average market level but does not show the differences among individual stocks. Even if the overall market declines, some industries or stocks may perform well; conversely, during market rallies, some stocks may decline against the trend.

3. Overweighting of Certain Industries: Electronic stocks constitute a significant portion of the Taiwan market, causing the index to overly reflect the trend of this industry. Other sectors may be underrepresented, leading to biased market signals.

4. Susceptible to Market Sentiment: Speculative trading, external news, political factors, and other non-fundamental factors can cause overreactions. These reactions are amplified in the index, making it difficult to accurately reflect the true value of companies.

5. Limited Coverage: The index only includes listed companies, so small-scale, low-volume, or unlisted companies are not reflected, making it incomplete in representing all Taiwanese enterprises.

6. Time Lag in Real-Time Reflection: The index is updated periodically, but market changes are instantaneous. In fast-changing environments, relying solely on the index may lead to timing gaps.

Investors who focus only on the index may fail to fully grasp the price movements and rhythms of different sectors, missing opportunities to understand the development stages of various industries, and potentially missing profits. Therefore, the index should not be the sole basis for judgment.

How to Use the Market Index for Technical Analysis?

Technical analysis predicts future stock price movements based on past price changes, helping investors estimate the trend over a period, but it cannot guarantee absolute accuracy in predicting future performance.

Data available on trading platforms include: highest price, lowest price, closing price, opening price, trading volume within a specific period. The time span can be freely selected—from minutes (1-minute, 5-minute, 10-minute) to daily, weekly, monthly data, ranging from hours to years. Investors can choose according to their analysis needs.

After obtaining data, many analysts adopt a top-down approach, starting from macro analysis and gradually narrowing down:

• Use major indices for broad market analysis (e.g., S&P 500, Dow Jones Industrial Average, NASDAQ Composite)
• Conduct industry analysis to identify the strongest and weakest sectors
• Analyze individual stocks within selected industries

Specific directions for technical analysis include:

Grasping Overall Price Trends: Observe trend lines or moving averages. When prices stay above an upward-sloping trend line, or each pullback forms higher lows and each rally forms higher highs, the trend is upward.

Identifying Support Levels: Support levels are price zones where buyers see profit potential and tend to buy, preventing further decline. If the price breaks below support, it may continue downward, indicating weakening buying momentum.

Identifying Resistance Levels: Conversely, resistance levels are points where prices often stall or retreat during upward movements, usually near previous highs. Breaking through resistance signals a bullish trend and is favorable for the overall trend.

Candlestick Analysis is also a common tool. By observing open, close, high, and low prices, traders can gauge the strength of buyers and sellers. The highest point during the session reflects demand (buyers), the lowest point reflects supply (sellers), and the closing price indicates the final equilibrium.

For example, if buying exceeds selling at the open, pushing prices higher to a new high for the day, then selling pressure causes a retreat, but the close remains above the open, indicating buyers ultimately prevailed despite selling pressure. Candlestick patterns help interpret how supply and demand fluctuate—higher prices indicate increased demand, lower prices indicate increased supply.

Note that major events such as unexpected executive departures or political incidents can cause “extreme news” to overpower technical signals. In such cases, technical analysis may fail, and investors should wait for market stabilization before resuming analysis.

Taiwan Market Index Investment Guide: Direct Investment Methods and Precautions

How to directly invest in the market index?

The most common way is through Exchange-Traded Funds (ETFs), which are passive funds that track the index’s movements without active stock selection by fund managers. Returns are usually moderate, with lower risk. Advanced investors may also use Taiwan stock index futures and options for arbitrage or hedging.

Key considerations for investing in the Taiwan Market Index

Assess Personal Risk Tolerance: Investing in the index is essentially investing in stock funds, which carry risks. Investors should first understand their risk acceptance level, make decisions based on risk preference, and avoid reckless investments.

Understand Component Stock Weightings: High market cap companies have a stronger influence on the index. TSMC, for example, has a particularly high weight in the Taiwan Market Index, so investors should pay close attention to its performance.

Master Trading Hours: The Taiwan Stock Exchange trading hours are Monday to Friday, 9:00 AM to 1:30 PM (GMT+8). Investors should be aware of these times, especially if they are in different time zones.

Follow Macroeconomic Data: Stay updated on Taiwan and global economic conditions, such as GDP growth, interest rate policies, inflation, etc., as these factors influence index movements.

When investing in the Taiwan Market Index, it is essential to understand the index thoroughly and combine technical indicators with fundamental analysis for comprehensive judgment. Seize opportunities but trade rationally to achieve long-term stability in the stock market.