## Want to understand Taiwan stocks? Start with the overall market trend

Many investors often get confused by the concept of the "Taiwan Stock Market Index." Simply put, **the Taiwan Stock Market Index is a barometer of the overall stock price performance of companies listed on the Taiwan Stock Exchange**, representing the market's ups and downs with a single number. When we say "Taiwan stocks rose 200 points today," we're actually referring to the overall market trend.

But here’s the question—can an index truly reflect the market? This seemingly simple question actually hides some traps that investors need to be aware of.

## How is the Taiwan Stock Market Index actually calculated?

**The official name of the Taiwan Stock Market Index is the "Taiwan Weighted Stock Price Index,"** which uses a market capitalization-weighted method. The logic is: larger companies have a greater influence on the index, while smaller companies have less.

To understand with an example: suppose there are two listed companies, Company A with a market cap of 100 billion yuan, and Company B with a market cap of 10 billion yuan. When Company A's stock price rises by 5%, its impact on the overall index is far greater than Company B's stock price increasing by 50%. This is the so-called "weighting" concept.

The specific calculation method is: **Market Cap = Stock Price × Number of Shares Outstanding**. For example, if a company’s stock price is 150 yuan and it has issued 20 million shares, its market cap is 300 billion yuan. The larger the market cap, the more influence that company has on the overall market performance.

In comparison, there is another calculation method called the "price-weighted index," used by the Dow Jones Industrial Average. However, this method can be "hijacked" by high-priced stocks, while companies with lower stock prices but large scale are overlooked. The reason Taiwan chose the market cap-weighted method is to ensure that market value truly determines the weight, avoiding such unreasonable phenomena.

## Investing with the market index: convenience and risks coexist

**The biggest advantage of watching the overall market trend is that you get a quick grasp of the big picture.** The Taiwan Stock Market Index covers all common stocks listed in Taiwan, with a broad sampling range, providing a relatively comprehensive reflection of market conditions. For investors who want to quickly understand the overall temperature of Taiwan’s stock market, this is an essential indicator.

But honestly, relying solely on the market index for investment decisions has many pitfalls:

**First, large companies have absolute influence over the index.** In Taiwan stocks, TSMC’s weight is abnormally high, and a few leading companies can easily sway the entire market trend. When these companies rise or fall, the performance of small and medium-sized enterprises is often completely overshadowed, making it hard for investors to see what they are actually doing.

**Second, the average rise and fall of the market can mask individual stock differences.** A market decline today doesn’t mean all stocks are falling; a market rise doesn’t guarantee your stocks will go up. In the same market environment, some industries or stocks may defy the trend and rise, while others may fall. Making trades based only on the index often causes missed opportunities for structural gains.

**Third, industry weights are severely unbalanced.** Electronics stocks dominate the Taiwanese market, causing the index to overly reflect the electronics sector’s direction, while other industries’ performance is marginalized.

**Finally, there’s always a lag in timeliness.** Market changes are instant, but the index is updated periodically. In fast-moving markets, relying on the index can be a step behind. Investors who follow the index blindly are like driving with a rearview mirror—prone to crashes.

Additionally, the index only covers listed companies, so high-quality companies that are not yet listed or have low trading volume are not reflected, limiting the index’s representativeness.

## How to use technical analysis to understand the market trend?

Many investors try to use technical analysis to predict market movements. While this is a valid approach, remember: **technical analysis can only help you identify higher-probability opportunities, not guarantee 100% accuracy**.

Before starting technical analysis, you should look at three levels from top to bottom:

First, analyze major indices (such as the Taiwan Stock Market Index itself, global major indices, etc.) to determine the overall market direction.

Second, conduct industry analysis to identify which sectors are strong and which are weak.

Third, select individual stocks.

Common technical analysis tools include:

**Trend lines and moving averages**: As long as the stock price stays above the upward trend line and each pullback forms a higher low, the trend is upward. Conversely, if it breaks down, the trend is downward.

**Support and resistance levels**: Support is the price zone where buyers are willing to step in; when the price falls to this level, buy orders tend to absorb the selling. Resistance is where sellers start to unload; when the price reaches this level, selling pressure increases. Breaking through key resistance often signals a larger upward move.

**Candlestick analysis**: By examining the relative positions of opening, closing, high, and low prices, you can gauge the strength of buyers versus sellers. If the closing price is far above the opening, buyers are in control; if below, sellers dominate.

However, be cautious—when major news events occur (such as corporate executive changes, geopolitical risks, etc.), technical analysis may become invalid. In such cases, investors should pause and wait until market sentiment stabilizes before re-analyzing.

## Can you directly buy the market index? How to invest?

**Yes, the most common way is to buy ETF funds.** These passive funds automatically track the market index, with fund managers not actively selecting stocks but mechanically adjusting holdings to replicate index performance. The advantages are low costs and diversification; the downside is that returns are limited, and you cannot outperform the market.

For advanced investors, using Taiwan stock index futures or options for arbitrage or hedging is also possible, but this requires professional knowledge and higher risk tolerance.

**Important reminders when investing in market stocks:**

Assess your risk tolerance first. All investments carry risks—don’t relax your guard just because you want to diversify.

Understanding the component stocks’ weight distribution is crucial. Especially TSMC’s weight in Taiwan stocks, investors should pay close attention.

Be aware of trading hours. The Taiwan Stock Exchange trading hours are Monday to Friday, 9:00 AM to 1:30 PM (GMT+8). If you are overseas, factor in the time difference.

Continuously monitor macroeconomic conditions. GDP growth rates, interest rate policies, inflation, and other macro data all indirectly influence the direction of the market.

## Final advice

Investing in Taiwan stocks shouldn’t be solely focused on the market index. While the trend of the market stocks is important, it’s only part of the full picture. Smart investors should treat the index as a reference, combining individual stock analysis, industry research, and fundamental investigation to make more rational investment decisions. Remember, chasing the index’s highs and lows often results in buying at the top and selling at the bottom. Use the market index to determine the overall direction, and employ other tools for precise stock selection—that’s the right way to open the door to successful investing.