: Investing in Stocks
In the Kingdom of Saudi Arabia, all stocks are
traded on the capital market. If you want to
buy or sell shares of a stock, you are required
to open an investment account to build your
portfolio through an authorized person. You
ordinarily pay the authorized person a fee or
a commission for the service provided.
How do you Buy and Sell Stocks
• If you place a market order, the authorized
person will trade the stock at the current
market price. However, the price of the
stock may change before your order goes
through. In this case, you may end up with
a different price than what you had expected.
• A limit order is when the stock reaches
the limit price then the order would be
valid. As a result, if the stock goes up or
down before the sale goes through, your
order may not go through.
Working with an Authorized Person licensed
by the CMA
When you are ready to start investing, you
need to work with an authorized person to
help you buy the securities you want for your
portfolio. A list of licensed authorized persons
is published on the CMA website which can
help you in choosing the one that suits you.
An authorized person is required by law to
hold a valid license and must adhere to CMA
guidelines. These guidelines provide specific
rules for responsible trading, charging appropriate fees and commissions, as well as providing information about investments.
Your authorized person should be able to
help you through a professional who will answer any questions you might have.
Here are some questions to ask an authorized person you consider working with:
1. How much experience do you have working
with investors like me?
2. What investments do you recommend for
someone just starting out?
3. How much do I need to start trading?
4. How will you keep me up-to-date on how my
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investments are doing?
5. How can I pay you for your services?
What does Owning Stock Means?
When you buy a stock, you share equity, or
ownership of a small piece of a company.
• Owning shares of stock gives you the
right to participate in the company’s major decisions.
• Stock ownership also gives you the right
to dividend income, or some of the company’s profits, if the Board of Directors
decides to pay a dividend.
• Since you own the stock, you have the
right to sell it when you want to.
Each year, the company holds an annual meeting where shareholders vote on certain matters. For example, shareholders may decide
whether to approve the issue of additional
shares of stock or elect a candidate to the
Board of Directors. The number of votes you
have depends on the number of shares you
own. You can also attend the meeting and vote
in person or you can cast your vote through
another person by following the instructions
the company sends along with the announcement of the meeting.
Stocks Value
A company issues its first round of stock
through an Initial Public Offering, or IPO, at
a set price. The money raised from the IPO
belongs to the company. After that, investors
buy and sell shares in the stock market. The
price of the stock fluctuates up and down in
response to how much people are willing to
pay to own the shares.
Many things can influence a stock’s value,
which is measured by its price. These factors
include how much money the company earns,
how well its management performs, the type
of competition the company is facing, and the
market conditions in general.
How Can you Gain Profit?
Stocks can be a good investment in two primary ways, if you buy:
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• Income stocks which distributes a part of
its profits regularly.
• Growth stocks which have the potential
to gain value over time, and often reinvest
their profits instead of paying dividends
You can own stocks from both types.
How Can you Lose?
You can lose your investment in stocks if:
• the shares lost their value, especially in
the short term, in case investors lose confidence in the stock.
• there are more sellers than buyers in the
secondary market.
• the company that owns the stocks
stopped paying dividends.
Factors to Consider in Selecting a Stock
While you cannot be certain of how any
stock will perform in the future, researching will give you a better idea of whether a
particular stock is a good investment for you.
You can find information about a company on
the TADAWUL website by checking the company’s news column. You can also visit the
company’s website, review its quarterly statements and annual reports, and read newspapers and other financial periodicals. You may
also check the reports about a company that
are available on official financial websites.
There are many factors to consider when you
research a company. These include:
Stock earnings per share. The term earning
refers to a company’s profits after expenses.
Since it might be difficult to compare two
companies of different sizes on earning alone,
you can use stock earnings per share in making your investment decision. Stock earnings
per share are calculated by dividing a company’s total earning by the number of outstanding shares issued. The result will tell you how
much potential earning each share represents.
Current stock price. The current stock price
is important because you do not want to buy
a stock when its price is too high or purchase
stocks that you cannot afford. If your research suggests a certain company as a good
investment, you can decide how much you are
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willing to pay to own it. If the stock seems
too expensive, you might wait until the price
comes down to the amount you are willing
to pay.
P/E ratio. A company’s price-to-earnings ratio
is one of the most important ratios to measure the (increase/ decrease) in the share’s
price. It could urge people to invest in it to
gain profits. To calculate a company’s P/E ratio,
you divide its market price per share by its
earnings per share.
For example, if a stock had a price of 55 Riyals
per share, and earnings of 6 Riyals per share
then your P/E ratio would be:
Price per share: 55 Riyals
ــــــــــــــــــــــــــــــــــــــ = P/E of 27.5
Earnings per share: 2 Riyals
If the company continued to achieve revenue
of two Riyals of shares, the owner of the share
needs 27.5 years to get his invested capital.
Therefore, the use of P/E ratio as an indicator
is better than just using the share price just
to take an investment decision. For example,
a stock with a price of 100 Riyals with a P/E
ratio of 10 is considered better than a stock
with 10 Riyals with a P/E ratio of 20 multiplied, that is because the return on the first
share is greater than the return of the second share, even if the value is less.
Of course there are many other factors within the P/E ratio such as the future and the age
of the company, where there are companies
with high and not enticing P/E ratio. This results from the fact that these companies are
at their beginnings and did not achieve its inception in profits which reflect the P/E ratio
in a positive way and other factors that according to them you make your investment
decision.
Volatility and BETA
Judging the stocks volatility can be possible
sometimes through BETA. BETA compares
the volatility of an investment over time to
the volatility of the overall market, which
has a beta of 1. If the price of an investment
typically fluctuates more than the market as
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a whole, its beta will be greater than 1. If the
price is more stable, its beta will be less than
1. On the other hand, if the indicator BETA
was negative, then the stock will move in the
opposite direction of the markets indicator.
To be more precise, BETA measures the degree of the stock price movement with the
total market. Therefore, a stock with a beta of
1.8 is much more volatile than a stock with a
beta of 0.5.
BETA
Volatility in
the financial
market
Volatility in
100 Riyals
stocks with a
beta of 0.5
Volatility in
100 Riyals
stocks with
a beta of 1.8
5% 2.5 Riyals 9 Riyals
10% 5 Riyals 18 Riyal
20% 10 Riyals 36 Riyals
If a stock has a high beta, or is very volatile, its
price might fluctuate dramatically in the short
term. This might mean you can have high profits relatively quickly, but it also means you
could lose money if you sell when the price
drops. However, a stock with a low beta might
not have enough growth potential to help you
meet your goals.
Your Role in Building your Portfolio
One way to minimize risk is to create a wellrounded portfolio. When you are evaluating
a stock, you would want to ask how it fits in
with the rest of your holdings. If you already
have several similar investments, you may
want to look for a stock of a company that is
in a different type of business from the rest of
your holdings.
