Saudi stock market

Introduction

The Saudi market crisis was a relatively new market phenomenon as it had for long experienced stability compared to most world markets. The sharp increase began in February 2006 until late 2009.  The market crisis had a strong effect not only on people but also on the economy of the region. The dramatic drop in 2006 wiped out the substantial paper fortunes of many investors.  The market gained huge 1083% from the end of 1998 to 2005.  On 25th February 2006, the market touched 20967 before crashing to 6767 on 30th January 2007. The market collapsed, and the price index lost over 13000 points. The volatility in the market created a risk of depreciation in investment capital. (Falcom, 2008)

There were various factors that caused the Saudi market volatility. First, the year 2005 witnessed the broad spread of wealth and participation of common investors.  The country had a huge float of money from the oil sector that was diverted with to the stock market. Thus, the major reason of the boom was a large increase in the demand side given that a huge number of people started investing either directly or through different types of portfolios mainly provided by financial institutions. (Jouini, 2013)

The risk-averse nature of citizens in the nation also contributed in many stockholders withdrawing from the market due to fear.  This resulted in a classic bubble where the average P/E ratio rose as high as 50. Also, Saudi stock market was still unsophisticated, with a small number of institutional investors and no short-sellers. Often, market participants tend to trade more during the bull days. Everyone bought together, and everyone was selling together. Owing to heavy trading in newly listed large cap stocks, the value of shares continued to increase.  The stock market crisis signified the beginning stock market correction. In a short time, half the Saudi market value disappeared. The market adjustment led to severe losses for investors. The Saudi market crash was the worst in the entire history of Saudi stock market. (Alsubaie & Najand 2009)

Lessons learnt

One of the lessons from the Saudi market crash is that the market has a way of communicating with investors. Investment in stock markets combines both elements of timing of entry and estimation of returns based on fundamental stock analysis, stock technical analysis and sector analysis. For investors who gained on the market, timing and technical analysis were crucial. Rational investor behavior shows that that stock market prices should fully reflect all available market information. As more information is reflected, stock prices should adjust accordingly to show “fair value”. (Ramady, 2007)

 In reality, some information may not be readily available to the public thus not fully reflected in the price. Such information may be held by regulators, company insiders, competitors and other interested parties. Such seemed to be the case with Saudi stock market volatility during 2006.   Misinformation and downright insider dealing and manipulation significantly contributed to the loss of confidence by investors. However, the Saudi Capital Market Authority took action against alleged market manipulator. Therefore, there is a need for the transparent and effective signal to the market. When investors have the necessary information in hand, it is reflected in stock prices. Another lesson is that the pricing of shares in Initial Public Offerings should be checked to avoid undervaluation which leads to volatility in existing listed shares. (Lee, 2008)

Market in 2015

The market has recovered at a rapid pace as market results have been encouraging. 2015 is likely to have an above-average growth.

References

Falcom (2008) Saudi stock market: Bloom, Gloom and Boom.

Ramady A. M. (2007) Saudi Stock 2006:  Turbulent Arab News.

Lee P. (2008) Stock market crash obscures Saudi boom.

Jouini, J. (2013). Return and volatility interaction in Saudi Arabia. Journal Of Policy Modeling, 35(6), 1124-1144.

Alsubaie, A., & Najand, M. (2009). Abnormal trading volume in the Saudi stock market. Emerging Markets Review, 10(3), 207-225.

Sherry Roberts is the author of this paper. A senior editor at MeldaResearch.Com in graduate paper writing service if you need a similar paper you can place your order from custom research paper writing service.