Weighted Index Investment Guide: Core Concepts and Key Points for Trading the Taiwan Stock Market Index

Wanting to grasp the pulse of the Taiwan stock market and understanding the “Weighted Index” is the essential first step. Many novice investors feel unfamiliar and curious about the Taiwan stock market’s major index—what exactly does this number that appears daily in financial news represent? Today, we will explore this in depth.

The True Meaning of the Taiwan Stock Market Index and the Weighted Index

The Taiwan stock market index usually refers to the Taiwan Stock Exchange Capitalization-Weighted Stock Index, abbreviated as “Weighted Index.” This indicator reflects the overall performance of all common stocks listed on the Taiwan Stock Exchange and is a core reference for investors to gauge market trends and economic conditions.

Regarding “weighted,” it essentially means assigning different weights to various data points. An intuitive example: suppose a company has two departments, Department A with 10 people and an average performance score of 70; Department B with 30 people and an average score of 80. To calculate the company’s overall average performance, you can’t simply average 70 and 80; instead, you must consider the proportion of people—Department A accounts for 1/4, Department B for 3/4. The weighted average performance is: 1/4×70 + 3/4×80 = 77.5 points.

The concept of the Weighted Index is exactly like this. In the stock market, companies with higher market capitalization have a greater influence on the index, while fluctuations in smaller companies are relatively easier to overlook.

Comparison of Two Calculation Methods for the Index

Currently, the main weighting methods used in global stock markets are two:

Price-Weighted Index Operation

Representative index: Dow Jones Industrial Average (DJIA)

This method sums the stock prices of all sample stocks on the base date to form an initial base (set as 100 points). For example, if the market has two stocks: A at 450 yuan, B at 550 yuan, total 1000 yuan, the index is 100 points.

The next day, if A becomes 550 yuan and B becomes 600 yuan, total value is 1150 yuan, and the index rises to 115 points.

Major drawback: Stocks with higher prices disproportionately influence the index, while low-priced stocks’ fluctuations are easily ignored, making it unfairly reflective of the overall market.

Market Capitalization-Weighted Index Operation

The Taiwan stock market adopts the market cap weighting method, calculated as: Market Cap = Stock Price × Number of Shares Outstanding.

For example: two companies, Company A with a stock price of 150 yuan/share and 2000 shares issued, market cap 300,000 yuan; Company B with a stock price of 5 yuan/share and 140,000 shares issued, market cap 700,000 yuan. Total market cap is 1 million yuan, so the index is 100 points.

One month later, Company A’s stock drops to 130 yuan, market cap 260,000 yuan; Company B’s stock rises to 10 yuan, market cap 1.4 million yuan. The new total market cap is 1.66 million yuan, and the index rises to 166 points.

Advantages of market cap weighting include a fairer reflection of the actual influence of large companies and better alignment with investors’ real holdings.

Pros and Cons of Investing in the Taiwan Weighted Index

Core advantages of using the weighted index

An index can grasp the macro trend of the entire stock market, covering all listed common stocks in Taiwan, with comprehensive data sampling, fully reflecting overall market movements. This is highly valuable for investors who want to quickly understand market direction.

Issues to be cautious of when using the weighted index

Small and medium-sized enterprises may be marginalized: Because of the market cap weighting, large-cap companies’ fluctuations significantly influence the index, while the movements of small and medium-sized companies are often overlooked. This can lead to situations where the market rises or falls, but the true conditions of most companies are masked.

Cannot reflect individual stock differences: The weighted index shows the market’s average level, but there can be significant differences among stocks and industries. Some sectors may rise against the trend even when the overall market declines, and vice versa.

High industry concentration: Due to the large proportion of electronics stocks in Taiwan, the weighted index over-reflects the electronics sector’s movements, potentially neglecting other industries’ developments.

Susceptible to market sentiment: The index can overreact under speculative trading, sudden news events, or political factors, amplifying the impact of non-fundamental factors.

Limited to listed companies: The index only includes listed firms, so smaller, low-volume, or unlisted companies are not reflected, making it unable to fully represent all industries in Taiwan.

Lagging timeliness: The index is updated periodically, but the market changes rapidly, which can lead to analysis gaps during fast-moving行情。

Investment advice: Do not rely solely on the weighted index for judgment; combine it with other technical indicators and fundamental analysis to comprehensively understand the pace of rise and fall across sectors and their development stages.

Practical Methods for Technical Analysis Using the Weighted Index

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

Data available on trading platforms include: high price, low price, opening price, closing price, trading volume, etc. The time cycle can be chosen as minute-level (1 min, 5 min, 10 min, etc.), daily, weekly, or monthly, depending on analysis goals.

Hierarchical Market Analysis Framework

Many professional analysts adopt a “top-down” approach:

1. Macro level: Conduct broad market analysis through major indices like S&P 500, Dow Jones Industrial Average, and other global benchmarks.
2. Industry level: Analyze specific sectors to identify strong and weak companies within industries.
3. Individual stock level: Perform in-depth analysis of selected stocks within the chosen sectors.

Specific Technical Analysis Techniques

Identify overall trend: Use trend lines or moving averages to observe the direction of the weighted index. If prices stay above an upward-sloping trend line, with higher lows and higher highs on each correction and rally, the trend is upward.

Confirm support levels: Support is a price zone where buyers are willing to step in; when prices fall to this level, the decline often halts. If support is broken, it may indicate further decline, weakening the trend.

Judge resistance levels: Conversely, resistance (or pressure) levels are zones where prices tend to stall or retreat after rising to certain points. Breaking resistance signals a bullish trend, favorable for the overall trend.

Candlestick analysis: Observe the relationships among opening, closing, high, and low prices. High intraday points reflect buying strength; low points reflect selling strength. Candlestick patterns reveal how supply and demand are fighting: higher closing prices indicate demand exceeds supply, lower closing prices indicate the opposite.

Pay attention to sudden events: Unexpected news such as executive deaths or major political incidents can go beyond technical explanations. Patience is needed to wait for market stabilization before further analysis.

Can You Invest Directly in the Taiwan Weighted Index?

Investment Channels and Methods

You cannot directly trade the weighted index itself, but you can participate through:

• ETF Funds: Passive funds that track the weighted index without active stock selection. Advantages include lower risk and costs; disadvantages are limited returns.
• Stock Index Futures: Suitable for advanced investors, used for arbitrage or hedging.
• Options: Offer more derivative strategies.

Precautions Before Investing in the Weighted Index

Assess your risk tolerance: All financial investments carry risks. Before investing, clearly understand your risk preferences and capital capacity. Never invest beyond your means.

Understand component stock weights: TSMC has a huge weight in Taiwan stocks; high-market-cap companies have a stronger influence on the index. Familiarize yourself with these weight distributions before investing.

Master trading hours: Taiwan Stock Exchange trading hours are Monday to Friday, 9:00 am to 1:30 pm (GMT+8). Overseas investors should pay attention to time zone differences.

Monitor macroeconomic factors: Keep close track of Taiwan and global economic data, including GDP growth, interest rate policies, inflation, etc., as these influence the performance of the weighted index.

Summary

Mastering the principles and applications of the Taiwan Weighted Index is fundamental to stock market investing. Use the index to quickly understand market direction, but also recognize its limitations. Combine technical indicators with fundamental analysis to make more rational investment decisions. Remember: the weighted index is a tool, not an absolute truth.