Saudi Arabia's stock collapse

(FORTUNE Magazine) -- After rising from 2,500 to 20,000 points in three years, the stock market dropped to 8,019 last month. It's Riyadh's Black Monday.

1 What's happening? In two weeks, beginning Oct. 28, the Saudi market, called Tadawul, plunged 20%. It's the second time stocks have hit the skids this year, and investors have every reason to feel queasy: The market has lost more than half its value since an all-time high in February.

2 Why all the volatility? The country has been awash in oil money with nowhere to go but the stock market. The result? A classic bubble. (The average P/E ratio was as high as 50.) Also, the stock market is still unsophisticated, with few institutional investors and no short-sellers. "You had everyone buying together, and now you have everyone selling together," says Tarek Fadlallah, a director of equity sales for Nomura in Bahrain.

3 Who's been burned? Middle-class Saudis. Some sold their cars or spent their life savings to enter the market. Schoolteachers were admonished for day-trading. Half the 17.4 million population participated in an IPO of the petrochemical company Yansab last December. The recent cancellation of a popular after-work trading session helped trigger the recent collapse.

4 So why do I care? The despair could spur unrest in a strategic U.S. ally, says Ali Al-Ahmed, a Saudi scholar and director of the Gulf Institute think tank: "If there is such a thing as a bread revolution, this could be a stock revolution."