SAUDI ARABIA

The story of the Saudi stock market

How all the wheeling and dealing in share trade began

December 08, 2017

Saudi Gazette report

A FEW decades ago, nobody imagined a time would come when people will invest their savings in something abstract. People used to invest in commodities and physical assets such as cars, furniture, food and so on. Al-Riyadh newspaper travels through the timeline to explain how all it got changed following the oil boom.

In Saudi Arabia, share trading began in 1935 when the first joint stock company was floated. However, the Car Arabian Company did not survive as it was liquidated not long after its inception.

In 1954, Arabian Cement Company went public, becoming the first genuine joint stock company to test the challenges of time. Between 1954 and 1975, the number of joint stock companies increased to 14 with a total paid-up capital of SR1,655 million. With the start of the oil boom, this number rose to 34.

The stock market emerged in the Kingdom in the late 1970s when the number of public limited companies increased at a rapid rate. However, most of the deals related to shares took place directly between the seller and the buyer or through a few intermediaries.

A few years later, commercial banks started share trading and soon all dealings in stocks were conducted exclusively through banks. Local banks would open portfolios for shareowners and provide them with special cubicles where they could sit and conduct transactions.

In the late 1980s, the prices of shares increased dramatically that the government had to lay down rules to regulate their exchange.

Due to lack of regulations, stock trading was fairly limited through the early 1980s when oil prices were increasing, which in turn resulted in an increase in both the volumes of trade and market capitalization.

In 1985, the Saudi government placed all stock trading under the supervision and control of the Saudi Arabian Monetary Authority (SAMA) and discontinued the existing broker-based trading system.

The government then authorized local banks to act as brokers in order to protect investors against the adverse effects of speculation and to help the stock market develop and mature in a manner that would contribute to national development and in consistence with its policy of greater private sector participation.

On Nov. 23, 1984, a royal decree was issued to establish the Saudi Share Registration Company (SSRC), which was to be sponsored by local banks under the supervision of SAMA. The SSRC was in charge of managing the records of shareholders and share certificates, as well as providing support facilities for transactions and transferring and registering ownership of transactions automatically. This was the beginning of a new era for establishing a specific regulatory system for electronic share trading.

A new system known as “tadawul" was introduced by SAMA in 2001 for share trading, clearing and settlement. The system provided an efficient, accurate and brief trading cycle and speedy settlement. On March 19, 2007, the Council of Ministers approved the formation of the Saudi Stock Exchange (Tadawul) as a joint stock company.

Today Tadawul is the sole entity authorized in the Kingdom to act as the securities exchange. As of August 2017, it had 171 companies listed.

With technological advancements, shareowners are now able to complete transactions from the comfort of their living rooms with the help of computers. They no longer need to visit the bank to carry out a transaction.

No wonder, more and more people became attracted to share trading with hopes of making quick profits. Soon speculators emerged on the scene and prices started fluctuating quickly. Investors spent hours their eyes glued to the computer screen to watch the movement of shares they owned. Many people started consulting financial experts and listened to their advice. They would purchase or dispose of their share holdings in companies based on the comments of these experts.

As stories of those who became rich overnight by investing in stocks spread like wildfire, many ordinary people decided to take a shot at it. They borrowed money from friends and relatives and took out bank loans to invest. Oblivious to the risks involved, some went as far as selling their homes to try their luck in the stock market.

Instead of investing a portion of their money in stocks and setting aside the rest, they took huge risks by investing all.

The Tadawul suddenly crashed after it hit an all-time record of 20,966,58 points on Feb. 25, 2006. In the weeks preceding the collapse, the daily volume of trade reached SR40 billion and the share prices of 77 listed companies rose dramatically.

Following the stock market crash, the value of the listed companies plummeted sharply. The losses were estimated at SR2 trillion. The majority of the investors lost their money when the Tadawul All-Share Index (TASI) hit the rock bottom at 4,068 points in March 2009. Today, investors in stocks are more wary of the risks involved.


December 08, 2017
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