Want to trade Taiwan stocks? First, understand how the major indices work so you don't fall into traps.

If you want to make money in the Taiwan stock market, the first thing you need to understand is what the “market index” is. Many novice investors watch the ups and downs of the market index but don’t really know what it actually represents, nor how much influence it has on their investment decisions. Today, we will take an in-depth look at the Taiwan stock market index and how to use it for investing.

The market index is actually a “thermometer” for the Taiwan stock market

The Taiwan Stock Exchange’s weighted stock index, commonly known as the Taiwan Weighted Index or the TAIEX, is fundamentally a tool used to measure the pulse of the entire Taiwan stock market. It reflects the overall performance of all listed stocks in Taiwan, including leading companies like TSMC.

Simply put, when someone asks “How’s the Taiwan stock market lately?”, they are referring to whether this index is rising or falling. The key to understanding why an index can represent the entire stock market lies in its calculation logic.

The market index is essentially a weighted average of all listed stock prices. To illustrate with a daily example: suppose a grade has two classes, Class 1 with 30 students and Class 2 with 70 students. Their midterm exam scores are an average of 85 and 80, respectively. To calculate the grade’s overall average, you can’t just do (85+80) ÷ 2, but need to consider the weight of each class, i.e., Class 1 accounts for 30%, Class 2 for 70%. So, the overall average = 30%×85 + 70%×80 = 81.5.

The market index follows this same logic, but replaces “number of people” with “stock weight.”

Two main methods of calculating the market index, each with its pros and cons

Global stock markets typically use two methods to calculate weighted indices. Understanding the differences can help you interpret market trends more accurately.

First is price-weighted. The Dow Jones Industrial Average (DJIA) uses this method. It sums the prices of all sample stocks on a base date and sets that as 100%. For example: if the market has two stocks, A and B, with base prices of 400 and 600 respectively, the total is 1000, and the index is set at 100 points. The next day, if A rises to 500 and B to 650, the total becomes 1150, and the index rises to 115 points.

This method has a clear flaw: stocks with higher prices have a greater influence on the index, while lower-priced stocks’ movements are easily overlooked. A 10% fluctuation in a high-priced stock can have a much larger impact on the index than a 50% move in a low-priced stock.

Second is market capitalization-weighted, which is also the method used by the Taiwan Weighted Index. It doesn’t look at stock price alone but considers each company’s market cap (stock price × number of shares) as a proportion of the total market. For example, Company A has a stock price of 200 yuan with 10,000 shares issued, so its market cap is 2 million. Company B has a stock price of 10 yuan with 3 million shares issued, so its market cap is 30 million. The total market cap is 32 million, and the index is set at 100 points. A month later, if Company A’s stock drops to 180 yuan (market cap 1.8 million) and Company B’s stock rises to 12 yuan (market cap 36 million), the total market cap becomes 37.8 million, and the index rises to 118 points.

Market cap weighting provides a more fair reflection of the true market situation, but it also introduces new issues.

The pros and cons of investing based on the market index you must know

Advantages

The Taiwan stock market index covers all listed common stocks, with a complete sampling range, allowing investors to quickly see what stage the overall stock market is in and its trend. This macro perspective is very useful for judging the overall market direction.

Many disadvantages, beware

The trend of the index is dominated by high market cap companies. Because it is market cap weighted, the stock price fluctuations of mega-corporations like TSMC have a much greater impact on the index than small and medium-sized enterprises. When a few large companies rise, the overall index may look good, but most small and medium stocks could be declining.

The index masks individual stock differences. The index reflects an average level, but the differences between industries and companies can be huge. Sometimes, the overall market declines, but certain stocks or sectors surge; other times, the market rises, but some stocks fall.

Electronics stocks overly dominate the index. In Taiwan, the electronics industry has a particularly large weight in the index, which causes the index to overly reflect the movement of the electronics sector, while paying less attention to industries like finance or healthcare.

Market sentiment swings are amplified in the index. Speculative trading, breaking news, or political events can cause overreactions, which are especially evident in the index.

Only reflects listed companies, missing many market participants. Companies that are unlisted or small-scale are not included in the index, so the index cannot fully represent Taiwan’s overall economic situation.

Index updates are lagged. Although the index is updated periodically, market changes are instant. In highly volatile markets, relying solely on the index may lead to delayed reactions.

Key point: If you only focus on the market index, you may miss the details of sector movements and the different stages of development across industries, potentially missing investment opportunities. Never rely solely on the index as your only judgment criterion.

How to use the market index for technical analysis

The logic of technical analysis is simple: study past price patterns to predict future trends. While it can’t guarantee to predict the future with certainty, it can improve your chances of making correct judgments.

On any trading platform, you can access data such as opening price, closing price, high, low, and volume. The time span can be minutes, hours, daily, weekly, or monthly, depending on your analysis purpose.

Once you have this data, professional analysts usually adopt a “top-down” approach: start from the macro level (like the overall market), then narrow down to sectors, and finally focus on individual stocks. The specific steps are:

• Analyze the overall market trend using major stock indices like S&P 500, Dow Jones Industrial Average, etc.
• After selecting a sector, determine which companies are the strongest and weakest within it.
• Conduct in-depth analysis of individual stocks within the chosen sector.

When performing technical analysis, pay attention to:

Understanding the overall trend. By observing trend lines or moving averages, you can determine whether the current trend is upward or downward. As long as prices stay above an upward-sloping trend line, or each pullback forms a higher low and each rally a higher high, the trend is upward. Conversely, the opposite applies.

Identifying support levels. Support is the price level where buyers see profit potential and enter, preventing further decline. If the price breaks below support, it often indicates further downside and weakening buying strength.

Recognizing resistance levels. Resistance is the opposite: a price level where upward movement tends to stall or reverse, often previous highs. If the price successfully breaks through resistance, it is a bullish signal and favorable for the overall trend.

Candlestick analysis is also crucial. By observing open, close, high, and low prices, you can gauge the strength of buyers versus sellers during that period. If the close is much higher than the open, buyers dominated; if lower, sellers did. Each candlestick records the outcome of this battle.

Of course, also pay attention to major events, such as company management changes, CEO departures, international political events, etc. When “black swan” events occur, technical analysis often fails. The best approach is to wait patiently for the market to stabilize before continuing analysis.

Can you directly invest in the Taiwan stock market index? How to invest safely

Possible, but limited methods

The most common way to invest in the market index is by purchasing Exchange-Traded Funds (ETFs). These ETFs are passive funds that track the index’s performance without actively selecting stocks. The advantage is lower risk, but returns are also limited.

For more advanced investors, you can also use Taiwan stock index futures and options for arbitrage or hedging.

Things to check before investing

First, assess your risk tolerance. All investments carry risks. Before investing, ask yourself: How much loss can I tolerate? Decide your investment scale based on your risk preference. Never gamble everything on a single trade.

Second, understand the components and weight distribution of the index. Pay special attention to TSMC’s dominant position in the index, as its stock price fluctuations have the greatest impact on the overall index.

Third, pay attention to trading hours. The Taiwan Stock Exchange’s trading hours are Monday to Friday, 9:00 am to 1:30 pm (Taipei time). If you’re outside Taiwan, be mindful of time zone differences to avoid missing trading opportunities.

Fourth, keep an eye on macroeconomic data. Taiwan’s GDP growth rate, interest rate policies, inflation, exchange rate fluctuations, etc., all influence the market. Regularly reviewing these data can help you better predict market trends.

Summary

Understanding the Taiwan stock market index is your entry ticket into Taiwan stock investing. It helps you quickly grasp the market trend but should never be your sole basis for judgment. When using the index to analyze the market, combine it with other technical indicators and fundamental analysis to make more cautious and rational investment decisions. Seize opportunities while maintaining rational trading—this is the key to long-term profitability.

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