What is "Buying the Market"? A Guide to Investing in the Taiwan Stock Exchange Weighted Index

What Does Buying the Market Mean? A One-Minute Quick Guide

People often say “buy the market,” which actually means investing in tools (usually ETFs) that track the Taiwan stock market index to gain exposure to the entire Taiwanese stock market. Instead of researching individual stocks, it’s more straightforward to buy an index that represents the overall performance of Taiwan’s stock market. This is the core concept of buying the market.

Taiwan Stock Market Index, officially called the “Taiwan Weighted Stock Index,” abbreviated as “Weighted Index,” is a key indicator reflecting the overall stock price performance of listed companies in Taiwan. When we talk about “how much the Taiwan stock market rose or fell today,” we’re actually referring to the changes in this index’s value.

How Is the Index Calculated?

To understand the logic behind buying the market, first, you need to know how the index is calculated. Essentially, the market index is a weighted average.

For example: In a certain grade, there are two classes. Class 1 has 10 students with an average score of 80, and Class 2 has 20 students with an average score of 90. To calculate the overall average, you can’t just do (80+90) ÷ 2, but should consider the number of students: (1/3×80) + (2/3×90) = 86.7 points. This is what “weighting” means—assigning appropriate weights to each value.

Taiwan’s stock index uses a market capitalization weighting method. Simply put, the larger a company’s market cap, the greater its influence on the index. Market cap = stock price × number of shares issued.

Example:

• Company A: stock price 150 TWD/share, 2000 shares issued, market cap 300,000 TWD
• Company B: stock price 5 TWD/share, 140,000 shares issued, market cap 700,000 TWD
• Total market cap: 1,000,000 TWD, index set at 100 points

One month later:

• Company A’s stock drops to 130 TWD/share, market cap becomes 260,000 TWD
• Company B’s stock rises to 10 TWD/share, market cap becomes 1,400,000 TWD
• New total market cap: 1,660,000 TWD, index rises to 166 points, up 66 points

This explains why fluctuations in large companies like TSMC have a huge impact on the overall index.

What Are the Advantages of Buying the Market?

1. One Index Reflects the Entire Market Trend

The Taiwan stock market index covers all common stocks listed on the Taiwan Stock Exchange, with comprehensive sampling, effectively reflecting the overall market condition and economic climate. No need to analyze hundreds of stocks; one index can give you the big picture.

2. Risk Is Relatively Diversified

Buying the market essentially means investing in a basket of stocks. Compared to concentrated risk in a single stock, market investment spreads risk more broadly. Even if one company encounters problems, it won’t be fatal to your entire portfolio.

3. Suitable for Long-Term Investment

The market index represents the growth of the entire economy, which tends to rise over the long term with economic development. Lazy investors can buy and hold without frequent trading.

But Buying the Market Has Notable Drawbacks to Watch Out For

1. Large Stocks Dominate the Market

Because of market cap weighting, high-market-cap companies influence the entire market movement. TSMC has a very high weight in Taiwan stocks, which can lead to a “one company dominates” phenomenon—if one stock rises, the index follows; if it falls, the entire market may crash. The performance of small and medium enterprises is often overlooked.

2. Seeing the Average but Missing Individual Differences

The index reflects the overall market average, but individual stocks can vary greatly. When the index rises, it doesn’t mean your specific stock is also rising; conversely, during a market crash, defensive stocks may hold up. Investors can be misled by the illusion that “the market is up.”

3. Sector Bias Risks

Electronics stocks account for over 40% of the Taiwan market, causing the index to overly reflect the electronics industry’s movements. When giants like TSMC or MediaTek fluctuate significantly, other sectors’ performance gets overshadowed, and the index can’t balance the development across industries.

4. Market Sentiment Impact

The index often overreacts to market sentiment, political events, and external news. Panic selling or speculative buying can cause short-term volatility, rendering technical analysis less effective.

5. Only Includes Listed Companies

The index doesn’t include unlisted companies or smaller firms, so it can’t fully represent all economic entities in Taiwan.

6. Lagging in Real-Time

The index is updated periodically, but market changes are instant. Relying solely on the index for decision-making may lag behind real-time market movements.

How to Use Technical Analysis to Read the Market?

Technical analysis predicts future trends based on historical price data. While it can’t guarantee absolute foresight, it helps identify market opportunities.

Three Levels of Analysis

Professional investors often adopt a “top-down” approach:

1. Start with major indices (S&P 500, Dow Jones, Taiwan Weighted Index, etc.)
2. Analyze industry performance to identify strong and weak sectors
3. Focus on individual stocks

Four Major Technical Tools

Trend Determination

Use trend lines or moving averages to observe direction. As long as prices stay above an upward trend line, or each pullback forms higher lows and each rally higher highs, the trend is upward.

Support Level Analysis

Support levels are prices where buyers find it attractive to buy, providing buying pressure that prevents further decline. If the price breaks below support, it may continue downward, indicating weakening buying strength.

Resistance Level Analysis

Opposite of support. When prices approach resistance levels, they often stall or retreat. Breaking through resistance signals bullishness and favors an upward trend.

Candlestick Patterns

Candlesticks visually show opening, closing, high, and low prices. High points reflect buying strength; lows reflect selling strength; closing price indicates the final equilibrium. Observing candlestick shapes and combinations can reveal the tug-of-war between buyers and sellers. For example, a long upper shadow with a close near the open indicates sellers winning at high levels, but if the close is still above the open, buyers are resilient.

Impact of Major Events

Extreme news (such as sudden executive departures or political crises) can overturn technical signals. In such cases, investors should wait for market stabilization before resuming analysis.

Practical Ways to Invest in the Market

Most Common Method: ETF Funds

The most common way to invest in the market is buying ETF funds that track the weighted index (also called passive funds). Fund managers passively follow the index without active trading. Advantages are low costs and lower risk; disadvantages are that returns are usually not very high.

Advanced Strategies: Futures and Options

Experienced investors can use Taiwan stock index futures for leverage trading or hedging, or employ options for complex arbitrage strategies. These tools carry higher risks and require sufficient knowledge.

5 Key Tips Before Investing in Taiwan’s Market

1. Assess Your Risk Tolerance

All investments carry risks. Before buying the market, honestly evaluate how much fluctuation you can endure. Allocate funds according to your risk preference; avoid all-in positions.

2. Understand Component Stocks and Weightings

High-market-cap companies have strong influence. TSMC’s weight in Taiwan stocks is extremely high. Investors should pay close attention to its movements. If TSMC reports poor quarterly results, the entire market may be pressured.

3. Pay Attention to Trading Hours

Taiwan Stock Exchange trading hours are Monday to Friday, 9:00 AM to 1:30 PM (GMT+8). If you’re overseas, be mindful of time differences.

4. Follow Macroeconomic Indicators

Stay updated on Taiwan and global economic conditions—GDP growth, interest rate policies, inflation, exchange rates—all directly impact the stock market. When the economy improves, the market tends to rise; during downturns, it tends to fall.

5. Don’t Rely Solely on the Index for Decisions

The index is just a tool, not the only reference. Combine it with other technical indicators, fundamental analysis, and industry research for more rational investment decisions.

Conclusion

Buying the market is a relatively simple and risk-controlled investment approach, especially suitable for investors who don’t have the time to analyze individual stocks. But the prerequisite is to truly understand the composition, advantages, disadvantages, and usage of the index. When used properly, combined with other analysis tools and fundamental insights, it helps seize opportunities while maintaining rational trading and achieving steady asset growth.