Until now, only companies registered in Saudi Arabia or another of the six Gulf Cooperation Council nations have been allowed to buy and sell shares directly on the Saudi market, the Arab world's largest.
However, foreigners were allowed to trade indirectly through Saudi and GCC-based investment funds.
The Capital Market Authority said it will issue regulations for foreign investor participation on May 4 and these regulations will become effective in June.
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It said it took the decision after the Saudi Financial Market Co (Tadawul), which manages the Saudi bourse, said it was ready for the entry of foreign investors.
The measure will be limited to institutional investors, with individuals excluded, the statement said.
Tadawul will begin registering foreign investment firms qualified to trade on the bourse which has a market capitalisation of $530 billion.
As many as 162 firms are listed on the Saudi bourse, including Saudi Telecom Co, petrochemicals giant SABIC and the country's leading banks.