Complete Guide to the Taiwan Stock Market Index: Essential Tips from Understanding to Investing

What Does the Taiwan Stock Market Major Index Actually Represent?

When we talk about the trend of Taiwan stocks, we are essentially discussing the rise and fall of the Taiwan Stock Market Major Index. The Taiwan Stock Market Major Index usually refers to the Weighted Stock Price Index listed on the Taiwan Stock Exchange, which acts like a “thermometer” for the stock market, reflecting the overall performance of all listed companies in Taiwan with a single number.

Different countries have their own major indices to measure economic health. The United States has the Dow Jones Industrial Average and the S&P 500, while Taiwan uses the Weighted Index as its most important market indicator. Investors can quickly grasp the economic cycle and overall corporate performance in Taiwan by observing this index’s fluctuations.

How Is the Taiwan Stock Market Major Index Calculated? Understanding the Two Main Weighting Methods

To understand why a single index can represent the entire stock market, we need to clarify the calculation principles. Simply put, the major index is the weighted average of all listed stocks. For example, if a school has two classes, Class 1 with 10 students averaging 80 points, and Class 2 with 20 students averaging 90 points, the overall grade cannot be simply added together; instead, it is calculated proportionally: 1/3×80 + 2/3×90 = 86.7 points, which illustrates the concept of “weighting.”

There are two main methods for calculating weighted indices in global stock markets:

Method 1: Price-Weighted Method

This is used by the Dow Jones Industrial Average. For example, suppose there are two stocks, A and B, with base prices of 450 yuan and 550 yuan respectively, totaling 1000 yuan, and the index is set at 100 points. The next day, if A rises to 550 yuan and B to 600 yuan, the total becomes 1150 yuan, and the index rises to 115 points.

This method has a clear flaw: stocks with higher prices have a greater impact on the index, while stocks with lower prices are easily overlooked, making it unfairly reflective of the overall market situation.

Method 2: Market Cap-Weighted Method

The Taiwan Stock Market Major Index uses this method, which is a more scientific calculation approach. Market capitalization equals “stock price × number of shares issued,” representing how much it costs to buy 100% of a listed company’s equity at current prices.

For example: Company A’s stock price is 150 yuan, with 2000 shares issued, so its market cap is 300,000 yuan; Company B’s stock price is 5 yuan, 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, if Company A’s stock drops to 130 yuan (market cap 260,000 yuan), and Company B’s stock rises to 10 yuan (market cap 1.4 million yuan), the total market cap becomes 1.66 million yuan, and the index rises to 166 points. This method more fairly reflects each company’s actual influence on the market.

Pros and Cons of Investing Using the Taiwan Stock Market Major Index

Main Advantages

The Taiwan Stock Market Major Index covers all listed common stocks, with a very broad sampling range, capable of reflecting market trends quite comprehensively. Investors can grasp the overall stock market dynamics with a single index, which is its greatest advantage.

Key Disadvantages

Overweight of Large Companies, Small and Medium Stocks Easily Overlooked

Because of the market cap weighting, large-cap companies have a much greater influence on the index than small and medium-sized stocks. The rise or fall of a few large corporations can completely overshadow the true performance of small and medium enterprises, failing to fully represent market diversity.

Cannot Reflect Individual Stock and Sector Differences

The major index only shows the average level, hiding the significant differences among individual stocks. Some industries or stocks may perform well even when the overall market declines, or perform mediocre during market rallies.

Over-Concentration of Certain Industry Weights

In Taiwan, electronics stocks occupy a particularly large proportion, causing the major index to overly reflect the trend of the tech industry. The development status of other traditional industries can easily be marginalized.

Market Sentiment Amplification

Speculative trading, political events, external news, and other non-fundamental factors can drive the market to overreact, and such reactions are amplified in the index, leading to distorted volatility.

Time Lag in Data

The index is updated periodically, but markets change rapidly. Relying solely on the index for judgment may result in time delays, causing decision-making to lag.

Limited Coverage

The index only includes listed companies, so it cannot reflect non-listed enterprises, especially smaller-scale ones, and thus cannot fully represent the entire landscape of Taiwanese businesses.

How to Use the Taiwan Stock Market Major Index for Technical Analysis?

Technical analysis predicts future trends based on past price movements. While it cannot guarantee absolute foresight, it helps investors judge possible directional changes.

Analysis Framework: A Top-Down Three-Level Approach

First Level: Conduct broad market analysis using the major index, observing trends in major indices like Dow Jones, S&P 500, NASDAQ;

Second Level: Perform industry analysis to identify the strongest and weakest sectors;

Third Level: Conduct detailed analysis of target individual stocks.

Specific Technical Analysis Methods

Step 1: Confirm Trend Direction

Use trend lines or moving averages to observe. As long as prices stay above an upward-sloping trend line, with higher lows and higher highs on each correction and rally, it indicates an uptrend. Conversely, a downtrend is indicated if the opposite occurs.

Step 2: Identify Support Levels

Support levels are price zones where buyers find it profitable to enter, gathering to prevent further declines. If the price breaks below support, it suggests continued downward movement and weakening buying strength.

Step 3: Confirm Resistance Levels

Resistance (or pressure) levels are points where prices tend to stop or reverse during an upward move, often at previous highs. Breaking through resistance signals bullishness and favors the overall trend.

Candlestick Analysis

Candlesticks, based on open, close, high, and low prices, fully depict the tug-of-war between supply and demand. High points during the session reflect buying strength; lows reflect selling pressure; the closing price is the final outcome of the battle.

For example, if buying is strong from open to high but the closing price is far below the high, it indicates selling pressure has overtaken. Observing candlestick patterns can reveal market sentiment shifts.

Beware of External Events Disrupting Analysis

Major company events (like CEO sudden passing), terrorist attacks, significant political incidents, or “black swan” events can invalidate technical analysis. Investors should wait for market stabilization before resuming analysis.

Can the Taiwan Stock Market Major Index Be Invested in Directly?

Investment Methods

The most common way is through Exchange-Traded Funds (ETFs). These funds are passive, with managers tracking the index without active trading, so returns are generally moderate, and risks are relatively low, suitable for conservative investors.

For advanced investors, Taiwan stock index futures and options can be used for arbitrage or hedging to achieve higher returns.

Important Precautions Before Investing

Assess Your Risk Tolerance

All financial products carry risks. Before investing, honestly evaluate how much loss you can bear. Decide your investment scale based on risk preference, and avoid putting all your eggs in one basket.

Understand Component Stock Weightings

Companies with higher market caps have greater influence on the index. In Taiwan, TSMC’s weight is particularly large, so investors should pay close attention to its movements.

Be Aware of Trading Hours

The Taiwan Stock Exchange operates from Monday to Friday, 9:00 AM to 1:30 PM (GMT+8). Investors in different time zones should consider time differences.

Monitor Macro-economic Indicators

Keep an eye on Taiwan and global GDP growth rates, central bank interest rate policies, inflation rates, and other macro data, as these significantly impact the Taiwan Stock Market Major Index.

Combine Multiple Tools for Decision-Making

Do not rely solely on the index to judge the market. Use other technical indicators and fundamental data to make cautious investment decisions, seize opportunities, and maintain rationality.

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