The objectives of this study were to: (1) develop an injectable and biodegradable scaffold based on oxidized alginate microbeads encapsulating periodontal ligament (PDLSCs) and gingival mesenchymal stem cells (GMSCs); and (2) investigate the stem cell viability, and osteogenic differentiation of the stem cells in vitro. Stem cells were encapsulated using alginate hydrogel. The stem cell viability, proliferation and differentiation to adipogenic and osteogenic tissues were studied. To investigate the expression of both adipogenesis and ontogenesis related genes, the RNA was extracted and RT-PCR was performed. The degradation behavior of hydrogel based on oxidized sodium alginate with different degrees of oxidation was studied in PBS at 37 °C as a function of time by monitoring the changes in weight loss. The swelling kinetics of alginate hydrogel was also investigated. The results showed that alginate is a promising candidate as a non-toxic scaffold for PDLSCs and GMSCs. It also has the ability to direct the differentiation of these stem cells to osteogenic and adipogenic tissues as compared to the control group in vitro. The encapsulated stem cells remained viable in vitro and both osteo-differentiated and adipo-differentiated after 4 weeks of culturing in the induction media. It was found that the degradation profile and swelling kinetics of alginate hydrogel strongly depends on the degree of oxidation showing its tunable chemistry and degradation rate. These findings demonstrate for the first time that immobilization of PDLSCs and GMSCs in the alginate microspheres provides a promising strategy for bone tissue engineering.