How to Invest in Japanese Stocks via the Nikkei 225 Index: A Guide for Beginners

What is the Nikkei 225 Index and Why Is It Important

The Nikkei 225 Index is a key indicator reflecting the overall condition of the Japanese stock market. It comprises 225 leading companies listed on the Tokyo Stock Exchange, such as Hitachi, Fujitsu, Panasonic, Sharp, and Toyota, similar to Thailand’s SET50 index which includes top companies like KBANK, PTT, and CPF.

This index has a long history, first introduced on September 7, 2493 (more than 70 years ago), making it the oldest stock index in Asia. Subsequent calculations have been managed by Nihon Keizai Shimbun (The Nikkei) since 2513.

Price History and Movements of the Nikkei 225

The Nikkei 225 once reached a peak of 38,916 points at the end of December 2532 during the market bubble. However, after the US subprime crisis, it plummeted to 7,568 points at the end of February 2552.

Most recently, on December 17, 2568, the index rose to 49,512.28 points, an increase of 0.26% or 128.99 points compared to the previous day. During the day, it hit a high of 49,571.50 points and a low of 49,077.81 points, reflecting buying momentum and market volatility in Japan.

How is the Nikkei 225 Calculated?

The Nikkei 225 is calculated as a price-weighted index of 225 stocks, with the index value updated every 5 seconds during trading.

Basic Calculation Formula:

• Adjusted stock price = Stock price × Price Adjustment Factor (PAF)
• Index value = Sum of adjusted stock prices ÷ Divisor (Divisor)

Since Japanese stocks vary significantly in price—some trading at 50 yen, others at 50,000 yen— the PAF system has been used since October 2021 to normalize prices. Before that, Nikkei used a “presumed par value” system for price adjustment.

Which Industries Make Up the Nikkei 225?

The Nikkei 225 includes stocks from 36 industries grouped into 6 major categories as of December 18, 2568:

Technology (52.03%)

• Encompasses pharmaceuticals, electrical machinery, automobiles, precision instruments, and communications.
• The largest sector, nearly half of the index.

Consumer Goods (22.36%)

• Food, fisheries, retail, and services.

Materials (12.69%)

• Mining, textiles, chemicals, paper, petroleum, rubber, glass, and steel.

Capital Goods and Others (8.46%)

• Construction, machinery, shipbuilding, real estate.

Financials (2.39%)

• Banking, securities, insurance.

Transportation and Utilities (1.56%)

• Railways, land transportation, water transport, energy.

Criteria for Selecting Stocks for the Index

Stock inclusion in the Nikkei 225 is based on two main criteria:

1. Periodic Review (Periodic Review) Conducted twice a year (January and July), effective in April and October, selecting stocks based on:

• Liquidity: Measured by total trading volume and price volatility.
• Industry Balance: To ensure the index accurately represents the overall market.

2. Extraordinary Replacement (Extraordinary Replacement) Occurs when stocks are delisted due to mergers or market transfers. Replacement stocks are selected based on the same criteria and must belong to the same industry as the removed stock.

What Factors Drive the Index Price?

The movement of the Nikkei 225 depends on 8 key factors:

1. Global Economy Japan emphasizes exports, primarily to the US (ranked first) and China (second). The economic conditions of these countries directly impact Japan’s economy.

2. Japan’s Economic Growth (GDP) Strong economic expansion boosts corporate profits, positively affecting stock prices.

3. Monetary Policy Loose monetary policy and low interest rates reduce operational costs and increase profits.

4. Fiscal Policy High government investment and low taxation stimulate economic activity.

5. Industry Conditions Especially the technology sector, which accounts for 52% of the index, affected by inflation and trade restrictions.

6. Corporate Earnings The performance of the 225 companies directly influences stock prices.

7. Yen Exchange Rate A strong yen makes Japanese goods more expensive abroad, reducing exports and sales; a weaker yen boosts exports.

8. Global Oil Prices Japan relies heavily on oil imports; high oil prices increase production costs.

Why Invest in the Nikkei 225?

Benefit 1: Ownership of Major Companies Instead of buying individual Japanese stocks, investors can gain exposure to the overall Japanese economy through a single index, especially if they believe Japan’s economy will grow.

Benefit 2: High Liquidity Stocks are selected based on liquidity criteria, resulting in narrow bid-ask spreads, low price impact, and lower transaction costs.

Benefit 3: Diversification Investing abroad reduces domestic risk. When domestic political issues arise, the Nikkei 225 may be less affected.

However, investing in the Nikkei 225 carries high risk. It is one of the most volatile indices, offering potential for high profits but also significant losses.

What Investment Options Are Available for the Nikkei 225?

Besides buying individual Japanese stocks, investors can choose to invest via financial products tracking the index in two ways:

Option 1: Exchange Traded Fund (ETF) Many securities firms and fund management companies offer ETFs tracking the Nikkei 225, such as KT-JPFUND-A by Krung Thai Asset Management and TMPJE by TMBAM Eastspring.

This method is suitable for beginners and those who prefer lower risk, as investing in an ETF means holding all 225 listed companies simultaneously, with lower risk than individual stocks.

Risks to watch out for include:

• Issuer operational risk
• Liquidity risk of the fund
• Currency exchange risk
• Inability to continue investing in the fund

Option 2: Contract for Difference (CFD) CFD is a derivative allowing investors to profit from price movements without owning the underlying asset—only holding a contract.

Example: Instead of a large capital to buy 225 stocks, you put up a small margin. For instance, 1:100 leverage means risking 100 baht to control a 10,000-baht index position. If the index rises 1%, you gain 1% of 10,000 = 100 baht; if it falls 1%, you lose 100 baht, equal to your margin.

Advantages:

• Low initial capital
• Potential for high profits

Disadvantages:

• Very high risk
• Suitable for experienced traders who understand the market
• Small volatility can lead to rapid losses

Investments can be made through platforms like Mitrade and other brokers.

In summary, beginners should start with ETFs to reduce risk, while experienced traders with good market understanding may consider CFDs for higher profit potential.