The opening of the Saudi market, capitalised at about $530 billion, is one of the most keenly awaited economic reforms in the world's biggest oil exporter. The bourse would be one of the world's last major exchanges to begin welcoming foreign money.
The market will be open to eligible foreign financial institutions to invest in listed shares during the first half of 2015, the Capital Market Authority said in a statement.
Saudi authorities want to open the stock market to create jobs, diversify the economy beyond oil and expose local firms to more market discipline. They have been preparing the reform for years and have completed most technical preparations.
But the government has delayed implementing the reform, apparently concerned about causing volatility in the market as well as the political sensitivity of allowing foreigners to build large stakes in top Saudi companies.
Currently, foreigners are limited to buying Saudi stocks via swaps involving international banks and through a small number of exchange-traded funds, which are relatively expensive and inconvenient options.
Foreigners are at present believed to own no more than about 5% of the Saudi market, and to account for a smaller fraction of stock trading turnover.
Potential foreign interest in Saudi stocks is huge, because of the country's strong economy the International Monetary Fund on Monday raised its forecast for Saudi growth this year to 4.6% and the presence of some of the region's top bluechip firms.
These include Saudi Basic Industries Corp, one of the world's largest petrochemicals groups, and National Commercial Bank < IPO-NACO.SE>, the kingdom's largest lender, which plans an initial public offer of shares later this year that could be worth $4 billion to $5 billion.
This is a massive move for Saudi and for the region," said Rami Sidani, head of Middle East investments at Schroders, a top European fund manager, which already has about $250 million invested in Saudi Arabia through indirect means.
He added that the country "will definitely attract massive inflows".
The Saudi market index jumped 1.6% in early trade on Tuesday in response to the news, bringing its gains so far this year to 16 percent.
Foreign investors are estimated to own about 15 percent of other, much smaller stock markets in the Gulf such as Dubai. If foreigners raise their ownership of Saudi Arabia to that level, it could mean an inflow of some $50 billion into the country. In practice, Saudi authorities are expected to use a tight regulatory framework to ensure that inflows are much slower. The CMA said it would publish next month draft regulations for the reform; there would then be a 90-day public consultation period.