Performance of Saudi Stock Market Research Paper

Performance of Saudi Stock Market - Research Paper Example According to Alshogeathri (2011), the Saudi stock market has experienced six major market collapses since it was formalized in 1984. During these collapses several million worth of investments was lost by the investors and the substantial debts accrued by the investors (Alshogeathri, 2011). This in return has turned major investment funds and mutual funds out of the market due to volatility. This is the main reason why the Saudi stock market continues to be dominated by individual, and mostly retail, investors. In comparison to other developing markets, Saudi Arabia’s stock market is grown in tandem with those economies. In particular with the Gulf Cooperation Countries (GCC), the Saudi market has enjoyed more liberalized trading environment after the restructuring of the bourse in 2005. Most legal restrictions that had been imposed on the bourse were lifted, paving the way for a more integrated market (Marashdeh & Shrestha, 2010). Though Saudi Arabia’s stock market con trols approximately 35%-40% of the total traded volumes in the GCC, its market continues to face challenges that require it to have a more integrated approach to its neighbors.Marashdeh and Shrestha (2010) argue that the liberalization of the economies in the GCC markets has contributed to the increasing number of foreign investors in the GCC stock markets. Saudi Arabia’s market has benefited from this new wave. The number of foreign corporate investors in the market is increasing, though still the market is largely dominated by retail traders... Marashdeh and Shrestha (2010) argue that the liberalization of the economies in the GCC markets has contributed to the increasing number of foreign investors in the GCC stock markets. Saudi Arabia’s market has benefited from this new wave. The number of foreign corporate investors in the market is increasing, though still the market is largely dominated by retail traders. The fact that the market is susceptible to huge collapses has kept foreign corporate investors away from the market. This is steadily changing with changes in the governance structure of the market and the investment environment. Seeking further market integration with other GCC economies strengthens the Saudi market. The major downside of the Saudi market is the restriction on investment avenues by foreign investors. Foreign investors can only participate in the market through mutual funds managed by Saudi banks (Marashdeh & Shrestha, 2010). In comparison with other markets in the GCC, a Saudi investment cei ling of 25% foreign investment is a barrier to growth of the market. Other researchers that have done much of work in the area of performance of the Saudi stock market, such as Fama (1991) and Al-Saleh and Al-Ajmi (2012), are in agreement that efficient allocation of ownership of the economy across various sectors is the prime objective of a capital market. This means that the Saudi economy, with all other external factors remaining constant, should grow at the rate of the stock market growth. This is not the case in Saudi Arabia as shown by the many stock market collapses while the economy was growing. In this paper the researcher will review the existing literature on the performance of the Saudi stock market,