Why has the current market index become a must-learn for investors? An article explaining the investment logic of the Taiwan Stock Exchange Weighted Index.

Do You Truly Understand What the Taiwan Stock Market Index Is?

If you often hear people talk about “the market today rising or falling,” they are actually referring to the Taiwan Weighted Stock Index fluctuating. This index reflects not the performance of a single stock, but the overall health of the Taiwanese stock market.

Nowadays, the index has become the primary tool for investors to judge market trends. It covers all common stocks listed on the Taiwan Stock Exchange, especially major companies like TSMC and Hon Hai, whose performance directly impacts the index value.

In simple terms: the index is like a “stock market barometer.” When it rises, it indicates optimism; when it falls, it reflects pessimism.

How Is the Index Calculated? Why Are Some Stock Movements Ignored?

Understanding the logic behind index calculation helps you grasp the true market picture. The Taiwan Stock Market Index uses a market capitalization-weighted method—what does this mean?

Market Cap = Stock Price × Number of Shares Outstanding

For example: suppose Company A’s stock price is 200 NT dollars, with 10,000 shares issued, its market cap is 2 million NT dollars; Company B’s stock price is 50 NT dollars, with 500,000 shares issued, its market cap is 25 million NT dollars. When the total market cap is 27 million NT dollars, the index is set at 100 points.

If Company A’s stock price rises to 220 NT dollars, its new market cap becomes 2.2 million NT dollars, and the total market cap increases to 27.2 million NT dollars, the index rises to 107.4 points.

Here’s a key issue: companies with larger market caps have smaller percentage changes but exert a significant impact on the index; smaller companies, no matter how much they rise, are easily overlooked by the market. This explains phenomena like individual stocks hitting the daily limit-up while the overall index declines.

The Real Pros and Cons of Investing in the Current Market Index

What are the advantages?

The biggest benefit is “a diversified basket of investments.” You don’t need to pick individual stocks, yet you can participate in the growth of the entire Taiwanese stock market. The sampling is comprehensive, risk is relatively dispersed, making it suitable for investors who don’t want to spend too much effort researching individual stocks.

What are the disadvantages you must know?

1. Overweighting of Large-Cap Stocks Causes Distortion

TSMC has a very high proportion in the Taiwan index, meaning the index largely tracks TSMC’s performance. The entire index can be heavily influenced by a few large companies, masking the true condition of small and medium-sized enterprises.

2. Cannot Reflect Individual Stock Differences

An index rising doesn’t mean the stocks you hold will rise. Some industries can outperform even when the market declines, and vice versa. Relying solely on the index can cause you to miss structural opportunities.

3. Overconcentration in Electronics Stocks

Taiwan’s electronics industry dominates the market, leading the index to react excessively to electronic stock fluctuations, while neglecting the performance of other sectors like finance and food.

4. Market Sentiment Amplification

Speculative trading, black swan events, international political shifts—these non-fundamental factors often cause excessive volatility in the index. The index reacts quickly, but not always to the true economic situation.

5. Time Lag in Data

The index is updated periodically, but the market is constantly changing. When you see the index data, the market may have already shifted.

Want to Use Technical Analysis to Predict the Index? Here’s What You Should Know

Technical analysis is based on historical price data, helping you forecast “possible” future trends—note, “possible,” not “certain.”

Three-Step Analysis Method

Step 1: Look at the Big Picture (Macro Market)

Start with major indices—S&P 500, Taiwan Weighted Index, Nikkei 225. These are the global market indicators.

Step 2: Observe Sector Rotation (Mid-Level)

Is the electronics sector currently the market focus? Are financial stocks gaining momentum? Sector rotation is normal in the stock market.

Step 3: Identify Stock Opportunities (Micro-Level)

After determining the sector, select individual stocks within it. This prevents buying stocks from a declining industry.

Four Key Technical Indicators

1. Trend Lines and Moving Averages

If the price stays above an upward trend line, the trend is bullish. Higher lows and higher highs indicate an uptrend—consider riding the trend.

2. Support Levels

This is the price zone where buyers are willing to enter. When the stock price hits support, buying interest supports the price and prevents further decline. Breaking support usually signals further downside.

3. Resistance Levels

Opposite of support, this is where sellers are willing to sell. When the price reaches resistance, selling pressure increases. Breaking resistance is a bullish signal.

4. Candlestick Patterns

Open, close, high, and low prices form candlesticks. They reflect the battle between buyers and sellers during a period.

For example, if the price rises after opening, reaching the daily high, but then sellers push back, closing near the low—this indicates strong selling pressure later, and the buying advantage diminishes.

During extreme news events (such as an unexpected CEO death or sudden political incidents), technical analysis may become invalid. In such cases, wait for the market to stabilize before resuming normal analysis.

Can You Really Buy the Index Directly Now?

Yes, but the method is crucial.

The simplest way: buy ETFs

Exchange-Traded Funds (ETFs) tracking the index are the most convenient way to participate. These are called “passive funds”—fund managers do not pick stocks actively but follow the index mechanically.

Advantages are low costs and risk diversification; disadvantages are that returns are usually not spectacular because you are simply replicating the index performance.

Advanced methods: index futures and options

For experienced investors, arbitrage or hedging via Taiwan stock index futures is possible. But this requires professional knowledge and strong risk management skills.

Preparations Before Investing

1. Assess Your Risk Tolerance

Although index investing is diversified, you can still lose money when the market declines. Ask yourself how much drawdown you can accept.

2. Understand the Constituents’ Weights

Currently, TSMC has a very high weight in the index. If TSMC faces issues, the entire index will be dragged down. Regularly review the constituent composition and keep it in mind.

3. Pay Attention to Trading Hours

The Taiwan Stock Exchange trading hours are Monday to Friday, 9:00 AM to 1:30 PM (Taiwan time). If you’re overseas, account for the time difference.

4. Keep an Eye on Macro Data

GDP growth, central bank interest rate policies, inflation levels—all influence the index’s medium- and long-term trend. Regularly review these data points to help judge the overall direction.

Final Reminder

The current index is indeed a quick tool to understand the market, but it is not the only basis for judgment.

Focusing solely on the index can cause you to miss many structural opportunities in individual stocks; ignoring the index can make you vulnerable to market-wide reversals.

The most rational approach is: use the index to grasp the big trend, apply technical analysis to find entry points, and confirm your choices with fundamental analysis. Combining these methods will give you a better chance of successful trading in the Taiwanese stock market.