How to Invest in the Saudi Stock Market?

January 5, 2022

If you're speculating how to invest in the Saudi stock market, this article will guide you through the steps and give a basic understanding of the same.

Areej M Alturki
Founder, Nakla

Stock market investment remains one of the most rewarding propositions today. If you're speculating how to invest in the Saudi stock market, this article will guide you through the steps and give a basic understanding of the same.

What is a Stock market?

The stock market, also known as the Stock exchange, is the place where shares are bought and sold. Before dwelling more on the stock market, it is better to understand a few basic terms related to the stock market.

Stock - A stock basically depicts a portion of the ownership in a particular company. 

Share - Companies usually divide the ownership into smaller units called shares whenever they want to raise money from the general public. 

Thus, an investor usually buys a share or more to own a minuscule portion of a particular company. Furthermore, investors can earn dividends from the shares purchased and resell them at a higher price (subjected to market conditions).

How to invest in the Saudi stock market?

To invest in the Saudi stock market, one must have an investment account and local portfolio. One can contact authorized banks and brokers to create a portfolio for investments. Moreover, with the advent of digitalization, one can also use financial entities such as financial and investment platforms, which provide a simplified approach to investing in the stock market.

Any Saudi citizen and GCC national with a valid identification card or family card fulfilling the eligibility criteria can do stock trading. Before investing in stocks, investors must comprehend the risks and returns involving various types of securities. This step helps people make an informed decision. 

There are basically two types of stock exchanges: Primary and secondary markets. 

The primary market is where a company that is about to go public initially issues its shares to the public in the run-up to its initial public offering (IPO). Usually, companies are the sole sellers, whereas institutional investors are the primary buyers rather than individual investors.

After the IPO, institutional investors (along with the few who participated in the IPO) enter the secondary market to sell to individual investors. This is the secondary market where previously issued shares are continuously bought and sold.

Historically speaking, the Saudi Stock Market came into existence in 1932 when "Arab Automobile Company," the first joint-stock company, was established. Later on, there was an unofficial stock market due to the growing number of companies. 

Thus, Royal Order No. 8/1230 was issued in 1984 to supervise the stock exchange and trade. The Saudi Arabian Monetary Agency (SAMA) was tasked with regulating market activity and enforcing securities trading regulations.

However, there was a breakthrough in the stock market in 2001 when the "Tadawul" system was first introduced. It had an advanced system for activities such as trading, settlement, and clearing.

Furthermore, Tadawul categorizes and arranges orders based on priority, price, and time. When sell and buy orders are matched and executed concurrently, equities are transferred from the seller's portfolio to the buyer's.

In the early stages of trading, commercial banks acted as mediators between the stock market and investors through the "Tadawul" system. However, today we can see that several more players can help in investing. 

Another notable milestone is the establishment of Capital Market Law or CMA, which helps restructure the financial market. It has the authority to enact the rules, regulations, and directives required to carry out the provisions of the Capital Market Law to safeguard investors and promote the fairness and efficiency of the capital market.

Today, the Saudi Stock Market is one of the dominating stock markets in terms of "Market Capitalization or Market Cap," along with daily traded volumes and rates. Although the companies listed in this market are fewer, it can be touted to be one of the active markets in the Arab countries. 

Apart from commercial banks, licensed brokerage firms and digital platforms play the role of intermediaries. 

Another important term that people must be aware of is the market index, which provides a basic idea of market performance trends. It is the basic which helps the investor understand the market, trends of buying and selling, and fluctuations in prices listed on the market.

The market indexes differ based on their goals in the financial markets. There are specialized indexes for the total market and specific market sectors or companies, such as small and large companies.

In the case of Saudi Arabia, Tadawul All Share Index or TASI is the market index that is in practice. 

TASI reflects the general level of company prices based on the market value of all companies listed on the market's free float stocks.

Now that you understand the Saudi stock market's basics and history let us see the steps required to make your first stock market investment. 

As mentioned above, a Saudi resident with a valid family card or ID card will be eligible to make investments. Since the trading will happen at Tadawul, the investor must have an investment account and local portfolio. 

Steps to trade through Tadawul: When potential investors decide to enter the stock market, they should follow the given steps:

  1. Create an investment account: Open an investing account with one of the brokers/banks/trading apps licensed to conduct securities transactions on the Saudi Capital Market.
  2. Fill out the application: Complete the necessary application to acquire or sell a particular stock. Some brokers may provide buying and selling services online or over the phone, eliminating the requirement for the investor to be physically present. Furthermore, financial trading apps have further simplified the process, so you don't need to move around to trade.
  3. Place the order details: Determine whether the order is a buy or sell. The investor must select the correct and appropriate order when completing the application.

Please remember that numerous types of orders are available in the Saudi market, so make sure you understand them first. 

Order types:

Limit order: A limit order asks the broker to sell your shares at a specific price or higher or purchase new shares at a certain price or lower. On the buy side, it is the highest price you are willing to pay; on the sell side, it is the lowest price you are willing to sell.

Market order: A market order asks your broker (intermediaries)to purchase or sell a specific number of shares at the stock's current price. For example, if the broker joins the market at 10 a.m. and the stock price is 50 SAR, the broker will execute the order and buy stocks at that price.

Stop order: A stop order asks the broker to buy or sell shares at a predetermined price. When the stock price reaches that level, a stop order becomes a market order, and the trade is completed.

These are some of the order types you must know to buy stocks or sell stocks. While having a broker or other intermediaries will execute your orders and make suggestions, it is always good to know about the stock market and its terminologies. 

How to start learning stock market?

The stock market is a fascinating entity that provides a terrific opportunity to trade, invest, and learn about economic fluctuations. It is observed that almost everyone wants to try their hands at stock trading, but most back off, fearing the market volatility. Although it is a strong reason, ignorance about the stock market is why not many people invest in stocks.

The stock market is not as tough to grasp as one may believe, and anyone can learn how to trade stocks. There are numerous ways to learn the fundamentals of the stock market if one sincerely puts effort and is consistent in their approach.

You may wonder - Why should I learn how to trade stocks? Whether you are a professional, student, or retired person, you may have a few unfulfilled goals that involve money and investments. In such a case, learning about stock markets may provide you with a way to fulfill your aspirations.

Furthermore, investing a small amount of money may prove helpful in the future too! So, let us see how you can learn about stock markets below:

  1. Read stocks related books
  2. Follow a mentor
  3. Take help of online courses
  4. Get expert advice on stocks
  5. Analyze the stock market
  6. Open an investment account

FAQs

Is the stock market a good investment?

Yes, stock market investing has shown to be one of the most effective strategies for accumulating long-term wealth. As per the analysts, the average stock market return has been around 10% per year. While this is a good ROI, one must remember that it is just an average return. Moreover, the stock value may be more in some years and less in others.

Is the stock market safe?

Investing in the stock market is safe with proper research and plan. However, one must be ready for losses due to market trends and volatility. Analysts state that stocks perform well in the long term, so you may have to wait for a year or more to reap significant returns. Please remember to invest in reliable stocks if you want to safeguard your investments.

How do you make money in the stock market?

You can make money in the stock market in three simple ways: 

Sell at profits - This is the classic "buy low, sell high" technique where you sell your stocks at higher prices.

Short-selling: This is the "sell high, buy low" technique inverse of the above method. Here, you borrow stock (typically from a broker), sell it on the open market, and then repurchase it later if and when the price falls. You keep the profit by returning the shares to the lender. 

Dividends - These are profits per share awarded to shareholders as a bonus once a quarter. They are usually in cash but sometimes in the form of additional shares.

Which are the best stocks to invest in for beginners?

The best stocks that beginners can invest in are the ones that have a reliable historical price index. For instance, the top stocks to invest in Saudi Arabia are - Alujain Corp, Arab sea information system co, Ataa educational company, Arabian internet and communications services co, Zahrat Al Waha for trading company, etc. are some best stocks for beginners.

Conclusion

While buying and selling stocks is an exciting proposition to make money, remember not to invest your money in just one stock. Ensure you have a diversified portfolio to cut losses and stay afloat.

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