Chapter: 5 Investing in Stocks

Section: 4 How do I go about Investing in Shares?

Having decided to invest in stocks, there are various important aspects and steps that have to be borne in mind.


Selecting a Stockbroker
First of all, selecting a suitable stockbroker is vital. The broker should provide you, in addition to the basic buying and selling support, a reasonable service in terms of providing timely information, fast response to your requests, maintaining good record of your portfolio balances and transactions etc. The broker charges the investors for this service a commission that should be minimal and at par with the market rates.

In the Kingdom of Saudi Arabia, the brokerage function is limited with banks and all investors who buy and sell shares in the market have to go through a bank invariably. Banks charge a fee for this service that represents a nominal percentage of the transaction. However, with the implementation of the Capital Market Law, we are likely to see the establishment of brokerage houses in the Kingdom in near future.


Understating your own Investment Style
Risk taking is a highly relative matter that varies from one individual to another. It is important that one should understand his/her own style of investment approach. Aggressive investors tend to invest in high-risk shares and seek high returns whereas the moderate and low risk takers tend to be more careful in picking stocks and are willing to accept a mediocre return.


Trading vs. Investment
The investors who buy stocks with a view to make profit from the short-term price fluctuations are referred to as traders in the stock circles. Traders try to take advantage of price swings that take place in share prices in short intervals. They carefully study the market and stock price movements and act spontaneously to make profit. Trading involves a great amount of speculation and thus considered to be high risk. On the other hand, investors buy shares with a long-term orientation to gain capital growth and stable income.


Being Informed about The Corporate Developments and Earnings
To be a successful investor it is important that one is well informed about market sensitive information. Share prices are often influenced by various factors such as:

  • Earnings announcement

  • Dividend announcement

  • Management change/new appointments to the board of directors

  • Takeovers/mergers/strategic alliances

  • Fluctuation in economic factors relating to the company's performance

  • Sector (or industry) specific news

  • Major raw material price fluctuations

  • Regulatory developments affecting the company's performance e.g., changes in the tax regime, etc

  • Any news items that can have an impact on the performance of the company

The investor should be vigilant on the above factors that can either push the stock price up or bring the price down. In this context, in KSA, facilitates the investors to keep them up to date on market sensitive information in addition to its core information supply services.