Complete Guide to the Taiwan Stock Market Index: From Introduction to Practical Investment

What is the Taiwan Stock Market Index?

The Taiwan Stock Market Index typically refers to the Taiwan Stock Exchange Weighted Index, abbreviated as the “Weighted Index.” It functions like a “thermometer” for the stock market, reflecting the overall performance of listed companies in Taiwan with a single number. When we say “how did the Taiwan stock market rise or fall today,” we are essentially talking about the movement of this index.

This index covers all common stocks listed on the Taiwan Stock Exchange, representing the overall trend of the Taiwanese stock market. Large companies like TSMC are included, allowing the index to more comprehensively reflect market conditions.

Why use a weighted index instead of a simple average?

To understand a weighted index, imagine a factory with two production lines, A and B. Line A has 10 workers, and Line B has 20 workers. If the average hourly wage for A is 100 yuan and for B is 150 yuan, how should the factory’s average hourly wage be calculated?

Adding the wages directly and dividing by 2 would give 125 yuan, but this ignores the difference in the number of workers. The correct calculation is: (10×100 + 20×150) ÷ 30 = 133.3 yuan. This is the core concept of weighting—calculating averages based on the importance (weight) of each part.

Two methods of calculating the Taiwan Stock Market Index

Price-Weighted Method

Using stock prices as weights. Suppose the market has only two stocks: A at 450 yuan and B at 550 yuan, with a total of 1000 yuan set as the 100-point baseline. The next day, A rises to 550 yuan, B to 600 yuan, with a total of 1150 yuan, and the index rises to 115 points.

The problem with this method is that high-priced stocks have too much influence. A stock priced at 1,000 yuan can significantly impact the overall index, while stocks below 50 yuan, even with large percentage changes, may be overlooked.

Market Cap-Weighted Method

This is the method used by the Taiwan Stock Market Index. Market cap = stock price × number of shares issued, representing the cost to buy 100% ownership of the company at current prices.

For example, Company A’s stock price is 150 yuan with 2000 shares issued, giving a market cap of 300,000 yuan; Company B’s stock price is 5 yuan with 140,000 shares issued, with a market cap of 700,000 yuan. The total market cap is 1 million yuan, set as 100 points. One month later, A’s stock drops to 130 yuan (market cap 260,000 yuan), B’s rises to 10 yuan (market cap 1,400,000 yuan), total market cap becomes 1,660,000 yuan, and the index rises to 166 points.

This method is relatively fairer and less biased by stock face value.

Advantages of investing with the Taiwan Stock Market Index

The index covers all listed common stocks, with a broad sample scope, effectively reflecting the overall market trend. Investors can quickly grasp the market direction through a single index without analyzing each stock individually.

Limitations of investing with the Taiwan Stock Market Index

Large companies can overshadow small companies’ performance

Because of the market cap weighting, large enterprises’ fluctuations tend to dominate the index’s movement. The changes in small and medium-sized stocks are often overlooked, and a few leading stocks’ performance may completely mask the true situation of most other companies.

Cannot reflect individual stock differences

The index reflects an average level, but the actual performance of individual stocks can vary greatly. Some industries or stocks may rise against the overall trend during a market decline, or lag behind in a bull market.

High industry concentration

Taiwan’s electronic stocks constitute a high proportion of the market, so the index may overly reflect the electronic industry trend while neglecting opportunities in finance, traditional manufacturing, and other sectors.

Susceptible to market sentiment

Speculative trading, sudden news events, or political factors can cause overreactions. These non-fundamental factors are amplified in the index, leading to sharp short-term volatility.

Limited sample size

The index only includes listed companies, excluding smaller or unlisted firms. Therefore, it cannot fully represent the operational status of all Taiwanese enterprises.

Time lag

The index is updated periodically, but the market operates 24 hours. In fast-moving markets, relying solely on the index may result in noticeable time delays.

Investment advice: Relying solely on the index for decision-making often causes missed structural opportunities. Combining industry analysis, fundamental data, and technical indicators provides a more comprehensive market understanding.

How to use technical analysis to understand the Taiwan Stock Market Index?

Technical analysis predicts future trends based on historical price movements. While it cannot guarantee absolute foresight, it helps investors identify key turning points.

Analytical framework: Top-down approach

Most analysts adopt a three-layer approach:

• Macro level: First observe the overall index trend to judge the market direction
• Mid-level: Analyze the strength and weakness ranking of various industries
• Micro level: Select individual stocks within strong industries

Three key technical indicators

1. Trend judgment

Observe trend lines or moving averages. As long as prices stay above the upward trend line, or each correction forms higher lows and each rally higher highs, the trend remains upward. Otherwise, it indicates a downtrend.

2. Support level analysis

Support levels are price zones where buyers are willing to enter, enough to prevent further decline. If the price breaks below support, it suggests continued downward movement and weakening buying strength.

3. Resistance level analysis

Opposite of support. When prices approach resistance levels, they tend to stall or retreat, often near previous highs. Breaking through resistance is a bullish signal, favorable for trend development.

Candlestick analysis: records of supply and demand battles

The four key points of candlesticks are: opening price, closing price, daily high, and daily low.

From the pattern, we can interpret: the rise from open to high reflects buying power; the fall from high to close reflects selling pressure. If the open is low, high is high, and close is near the high, it indicates that despite selling, buyers ultimately prevailed. If the high is high but the close is near the low, it shows initial strength but eventual dominance by sellers.

By observing candlestick patterns, one can see the ebb and flow of supply and demand and potential reversals.

Special reminder: Sudden major events (such as unexpected executive deaths or geopolitical crises) can break technical logic. In such cases, pause analysis and wait until market sentiment stabilizes before continuing.

Can the Taiwan Stock Market Index be directly invested in?

Main investment tools

Exchange-Traded Funds (ETFs) are the most common method. These passive funds track the index’s rise and fall without active stock selection. Advantages include low costs and risk diversification, but they cannot outperform the index.

Advanced options: Experienced investors may use Taiwan stock index futures or options for arbitrage or hedging.

Five essential things to know about investing in the Taiwan Stock Market Index

Assess your risk tolerance

All investments carry risks. Honestly evaluate your risk appetite, allocate funds accordingly, and avoid reckless bets.

Research component stock weightings

Large-cap companies have a significant impact on the index. TSMC’s high weighting means its movements greatly influence the overall index. Pay close attention to these key stocks.

Understand trading hours

The Taiwan Stock Exchange operates from Monday to Friday, 9:00 am to 1:30 pm (GMT+8). If you’re outside Taiwan, account for time differences.

Continuously monitor macroeconomic environment

Regularly follow Taiwan and global GDP growth, interest rate policies, exchange rates, inflation, etc., as these factors deeply influence the index trend.

Avoid over-reliance on a single indicator

The Taiwan Stock Market Index is just a reference tool. Combine it with other technical indicators, fundamental analysis, and industry research for more robust investment decisions.

Summary: Understanding the characteristics and limitations of the Taiwan Stock Market Index is the first step toward becoming a rational investor. While seizing market opportunities, maintain rationality, listen to multiple voices, and aim for long-term steady profits.

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