For many years, there has been a growing wave of people learning how to buy stocks in the UAE. This trend toward smart, long-term investing will continue into 2023, especially since the rocky market of 2022 has left good buying opportunities for beginners to start their investing journey.

The main reason for this popularity is simple: today stocks remain one of the most rewarding investment assets out there. 

For example, the S&P 500 Index — which tracks the performance of the top 500 stocks in the US — grew by 106.80% in the past five years, amounting to an annualised return of 21.36%. In comparison, the best annualised return on savings accounts in the UAE is 1.75%, while the yield on a 50-year treasury bond is 2.7%. 

Oddly, many investors in the region still consider real estate to be the better investment. Yet, the highest gross yield in the property market is just 8.32%! Granted, you do have an asset that goes with that, but one needs to consider all other factors involved when making investment decisions. 

Given the profitability of stocks compared to savings accounts, bonds, and real estate, it is no wonder why new investors are increasingly seeking out ways to buy stocks in the UAE. 

In this article, we will help you get started buying stocks in the UAE by considering: 

1. What is the stock market? 
2. How to buy stocks in the UAE
3. Why you should buy stocks in the UAE
4. Factors to consider before buying stocks in the UAE

By the end of this article, you will be ready to use stocks to start growing your wealth — be it in a passive or active form.

1. What is the stock market? 

First, a few words about stocks. 

A stock is a portion of ownership in a company. When companies want to raise money from the public, they divide their ownership into smaller units called shares. To own a portion of the company, an investor will buy a share or more. 

The investor buys the shares with the intention of earning dividends or selling the shares at a higher price.

The place where the buying and selling of shares take place is called the stock market, also known as a stock exchange.

There are three main actors in a stock exchange market: 

• Buyer: The buyer is the investor looking to buy the shares of one or more companies. 
• Seller: The seller is the investor looking to sell the shares he holds in one or more companies. An investor can sell his shares to make a profit (sell at a price higher than he bought it) or to cut his loss (the stock is on a downward trend and it could be worse). 
• Stockbroker: The broker is the mediator who matches buyers and sellers. Individuals cannot buy and sell shares directly on the stock exchange; they need a stockbroker to facilitate the transaction.

Broadly speaking, there are two types of stock exchanges:

• Primary market: The primary market is where a company that is just going public first issues their shares to the public in the lead up to an initial public offering (IPO). In the primary market, the company is the only seller and the main buyers are institutional investors rather than individual investors. 
• Secondary market: After the IPO, the institutional investors (and the few individual investors who are able to buy in the IPO) go into the secondary market to sell to individual investors. The secondary market is where continuous buying and selling of the already issued shares take place.

As an individual investor, your main focus will be on the secondary market.

There are three stock exchange markets in the UAE where you (as an individual investor) can buy and sell stocks. 

Dubai Financial Market (DFM)

The Dubai Financial Market was established in 2000. The market is regulated by the Securities and Commodities Authority (SCA). It was completely owned by the Dubai government at inception, until it became a public joint-stock company in 2006. 

DFM is only open to companies that abide by sharia principles and there are more than 170 securities listed on the market. Those companies are majorly in the UAE, while some are from Kuwait, Bahrain, Oman, and Sudan.

Continuous trading takes place on this market from Sunday to Thursday within 10am and 1:50pm.  

Abu Dhabi Securities Exchange (ADX)

ADX was also established in 2000. Like DFM, they are also regulated by the Securities and Commodities Authority.

ADX also focuses majorly on companies in the UAE. The exchange currently lists 73 securities.

Continuous trading takes place on this market from Sunday to Thursday within 10am and 1:50pm.  

NASDAQ Dubai

While DFM and ADX focus majorly on UAE stocks and stocks in other middle eastern countries, NASDAQ Dubai has an international scope, with investment assets (stocks, bonds, REITs) from North Africa, India, and Turkey. 

The exchange is regulated by the Dubai Financial Services Authority. DFM remains the major shareholder (66%) of NASDAQ Dubai.The exchange currently lists 146 securities

Continuous trading takes place from Sunday to Thursday, from 10am to 2pm.

However, with an app like Sarwa Trade, individual investors in the UAE can also trade on the New York Stock Exchange (NYSE).

New York Stock Exchange 

Located in New York, United States, the NYSE is the largest stock exchange market in the world, with more than 2,400 listed securities and a market cap of $26.2 trillion. The world’s largest corporations are listed on the NYSE, providing investors access to the best-performing stocks in various industries.

For comparison, DFM only lists 170 securities, ADX lists 73, and NASDAQ Dubai lists 146. Also, the market cap of DFM is $97.38 billion, that of ADX is $199 billion, and that of NASDAQ Dubai is  $74.66 billion. 

While there are many good stocks on the local stock exchanges in the UAE, the NYSE provides the best opportunities for you as an investor. 

Consequently, Sarwa Trade offers you an even broader scope for your investments. 

2. How to buy stocks in the UAE

Now that you understand what a stock market is, let’s consider how to buy stocks in the UAE. 

In the traditional approach, to buy stocks in any of the three UAE exchanges, you needed to register for your investor number (NIN) by completing the investor number form online or offline. After that, you would register with a broker and then start trading. 

However, Sarwa Trade has simplified this process by focusing on the NYSE, which is the world’s biggest exchange, offering access to the best corporations from all over the world. 

All you need to start buying stocks is to open a free account on the Sarwa Trade app. 

Once you have an account, you can start buying and selling stocks as well as monitor the performance of your holdings. This includes the purchase of fractional shares, which allows you to buy small pieces of a company’s share price instead of the entire share.

There are three types of orders you can issue:

• Market order: A market order instructs your broker (Sarwa Trade) to buy or sell a certain quantity of shares at the current price the stock is trading. If the broker enters the market at 11am and the price of the stock is $50, he executes the trade at that price. 
• Limit order: A limit order instructs the broker to sell your shares at a specific price or higher or buy new shares at a specific price or lower. On the buy side, it is the maximum you are willing to pay; on the sell side, it is the minimum you are winning to sell at.
• Stop order: A stop order instructs the broker to buy or sell shares at a specific price. When the stock price is at that specific point, a stop order becomes a market order and the trade is executed.

Also, on the Sarwa Trade app, you will be able to monitor the performance of your holdings. 

Though Sarwa Trade offers access to the NYSE, it is not the only stockbroker that does this. 

So why use Sarwa Trade?

Why Sarwa Trade

First, Sarwa Trade is a zero-commission trading platform. You won’t pay any commission for every trade you make on Sarwa Trade.

Also, Sarwa Trade democratises investing by removing any minimum balance requirement, thus opening up its platform to the average investor, whatever the amount he/she has to invest. If all you have to invest is $100, you are as welcome as the person with $10,000.

Next, Sarwa Trade provides high-quality security through SSL encryption to protect your data and money. So you can have the utmost confidence when trading. 

Furthermore, Sarwa prioritises mobile access with a mobile-first app that offers incredible mobile friendliness. You can monitor your portfolio on the go through your smartphone. 

Sarwa Trade is changing the investment landscape in the UAE, helping every citizen and resident to accomplish their financial aims with zero cost, stress, or security risk.

[For more information on how to use Sarwa Trade, please read “How to Buy US Stocks in the UAE.”]

3. Why you should buy stocks in the UAE

Stocks provide the highest returns compared to bonds, savings accounts, or real estate.

As an investor who desires to grow his/her money, you should have stocks in your investment portfolio. 

To make the difference between stocks and other investment assets more real, consider four investors who invest 100,000 AED in savings accounts, bonds, real estate, and the S&P 500, respectively.

Based on the best annualised return on savings accounts in UAE, investor A will grow her 100,000 AED to 101,750 AED 

Investor B will grow her 100,000 AED to 102,700 AED after a year. 

Investor C will grow her 100,000 AED to 108,320 AED. 

However, investor D who bought the S&P 500 will have 121,360 AED if he sells after a year, based on the average long-term returns of the market.

Indeed, while research shows that though stocks are risky (keep in mind that the price of selling depends on the market movement at the time, just like all assets) they still provide the best returns over the long term.

The longer you stay in the market, the less the risk of losing your money and the more returns you will have. 

For example, a study of the S&P 500 between 1926 and 2019 has shown that the longer you stay in the market, the more likely you are to make money. If you stay for five years, the chance of losing money is 5%, whereas if you stay invested in the market for 10 years, it decreases significantly – to just 0.2%.  

4. Factors to consider before you buy stocks in the UAE

Let’s consider some important factors under two categories: factors relating to a particular stock and factors relating to an investment portfolio of stocks. 

Factors relating to a particular stock

While the prices of some stocks will appreciate in value, making you money, the prices of others will depreciate in value, causing you to lose money. 

The point here is that just going to the stock exchange market and buying any stocks won’t make you money. Stocks, like everything else, are not created equal. 

Therefore, as a minimum, you must research if a stock is good for your investment goals by understanding its: 

• Returns: You need to consider the historical returns of the stock as a way of approximating future returns. Of course, historical returns don’t guarantee future returns, but they can be good pointers. You should do a fundamental analysis of the stock that considers factors like earnings, debt, assets, among others. Also, you should consider industry trends and how they will affect the particular stock.

• Risk: Risk is as important as returns. The only money you can grow is the one you don’t lose. Therefore, you should consider the variability and volatility of the stock – how often the price changes over a specific period – daily, monthly, yearly, etc. 

There are numerous other factors that stock pickers use to select their investments. 

This includes studies of financial performance, management teams, and price volatility (which is done using the beta range), but we’ll leave these metrics for another, much more advanced, post. 

Factors relating to an investment portfolio of stocks

Diversification: Your defensive foundation 

No matter the prospects of a stock, it’s bad business to put all your investments in one stock. 

Why is this so? 

While that stock can make you a lot of money, you can also lose a huge part of your investments if the company fails and its stock price dwindles.

The only money you can grow is the capital you have not lost. 

Thus, the opportunity cost of losing money includes all the money you could have made if you had not lost it. 

Consequently, you should not put all your eggs in one basket. 

According to Harry Markowitz, a Nobel Prize Winner in Economics Science and pioneer of Modern Portfolio Theory, the best way an investor can minimise risk and maximise return is to have a portfolio of assets that are not positively correlated to one another – they should be uncorrelated or negatively correlated.

Two stocks are uncorrelated when the changes in one doesn’t affect the other. They are negatively correlated when one changes in a different direction in reaction to the other (that is, if A increases, B decreases). 

When two stocks are positively correlated, a fall in the price of one causes the other to also fall. Imagine a portfolio with two positively correlated assets. It means when A is losing money, B is following suit (bad news, right?). 

If they were uncorrelated, B won’t move in response to A, so you can lose money with A and not B. If they were negatively correlated, A will be losing money while B is gaining it.

[For more on the Nobel-prize-winning Modern Portfolio Theory, read, “The Brilliance of Modern Portfolio Theory: A Nobel Prize-Winning Formula To Cut Investment Risk”] 

So the best strategy for you is to build a diversified portfolio of uncorrelated or negatively correlated stocks instead of purchasing just one stock or two or more stocks that are positively correlated. 

To achieve this diversification, you need to buy stocks in different industries, different markets (countries), with different market capitalisation.

[To learn more about the value of diversification and how to achieve it, read, “The Importance of Diversification”]

Diversification: Experienced investors suggest no more than 20% in one industry 

Investing in stocks can be exciting, especially when it comes to testing out your hunches and research about a certain industry. 

When investing in stocks, you have the ability to freely put your money into thematic ETFs or a certain amount of stocks in a given industry, but overweighting in any one industry or theme is not advisable. 

Kevin O’Leary, the famed US investor and a star of the TV program Shark Tank, has said that he recommends not placing more than 20% of your portfolio in any one given industry. Often, for a growth investor, this means not owning more than 20% worth of tech industry stocks in your portfolio — an error that many novice investors tend to commit. 

In general, don’t get carried away with one sector and always diversify across multiple industries. 

Risk tolerance

Since your financial goals and time horizon (how close or far you are to retirement) are different, your risk tolerance will be different from another investor. 

Therefore, copying another person’s portfolio when you don’t know if your risk tolerance is similar might not be the best approach.

Ensure you build your portfolio with a dutiful consideration of your risk capacity and tolerance.

[Interested in building an investment portfolio from scratch? Read: “Building an Investment Portfolio from Scratch: The Ultimate Guide”]

Long-term investing

In the day to day, the market can seem volatile. However, wealth growth is most likely to occur after spending more and more time in the market, rather than buying and selling stocks too often. This is known as trying to time the market.

In essence, the longer you stay in the market, the better the chances of growing your money rather than losing it.

In the short term, markets move in response to investors’ speculation about possible price movements, but in the long term, prices tend to move closer to the actual value (intrinsic value) of the stock. 

Therefore, growing the value of your portfolio in the long term should be the goal. 

That way, you can both protect your money and grow it.

[For more on why long-term investing is preferable, read, “Does Market Timing Work”]

Now that you know how to buy stocks in the UAE, you are one step closer to starting your investment journey and growing your wealth. 

Want to take the next step to achieve your financial goals? Schedule a free call with a Sarwa Wealth Advisor and we will be glad to take that journey with you. 

Takeaways

• Because stocks historically have provided the highest returns compared to savings accounts, bonds, and real estate, they belong in your investment portfolio.
• Traditionally, to trade stocks in exchanges, you’ll need a NIN and a broker.
• Before buying any stock, do fundamental analysis to be sure it’s a good buy. 
• Don’t put all your eggs in one basket. Diversify to minimise risk and maximise returns. 
• Choose the broker with the lowest commission, an online presence, a friendly mobile app, data security, and excellent customer support.