Is Investing in Stocks Haram or Halal?

Why Investments Are Made in Stock Markets?

Investments in stock markets are seen as a strategic maneuver in the world of finance, driven by a myriad of underlying factors.

1. WEALTH ACCUMULATION:

Firstly, stock investments offer an avenue for wealth accumulation by capitalizing on the growth potential of corporations. Investors, by purchasing shares, essentially acquire a stake in the company, sharing in its success.

2. DIVIDENDS:

Secondly, many stocks provide regular income in the form of dividends, contributing to cash flow regardless of market conditions.

3. SPECULATIVE GAINS:

Additionally, stock markets, with their inherent volatility, present opportunities for speculative gains, with astute investors able to make profits by buying low and selling high.

4. HEDGE AGAINST INFLATION:

Lastly, investing in stocks is a hedge against inflation, preserving the purchasing power of money by earning returns that outpace the rate of inflation.

The Difference Between Halal and Haram Investments:

Before discussing the topic of investing in stocks, it is important to understand the difference between halal and haram investments.

• Halal investments are those that are permissible according to Islamic law and ethics, while haram investments are those that are prohibited.
• Industries such as gambling, alcohol, tobacco, and pornography often fall into the category of Haram investments. Additionally, investments implicated in elements like riba (interest), gharar, maysir (maisir), and others also enter this category. On the other hand, halal investments may include industries such as real estate, technology, and healthcare.

Shariah Compliant Stock Market Trading:

Shirkah Model:

The earliest form of stock trading can be traced back to the 12th century in Venice, Italy. However, in Islamic finance, the concept of investing in stocks is relatively new. In the 20th century, Islamic finance scholars began to discuss the concept of investing in stocks and whether it was halal or haram.

In the past, there used to be Shirkah or a partnership between a few people, however, in the last three centuries, its new form came into existence. This new form of partnership is called a “Joint-Stock Company”, which is owned by shareholders.

Share may be defined as: “A ratio of ownership, which the shareholder has got in the assets of a company”.

Example:

“Ali” decides to become a partner of a company, and he purchases 10,000 out of its total One-Lac shares. A certificate of 10,000 shares is issued to “Ali” against his payment, and so, “Ali” becomes the partial or 10% owner of that company. With that ownership, “Ali” also becomes the 10% owner of the assets of that company”.

• Shares float in the market, and invite people to purchase them;
• Any person, who purchases the shares, actually participates in the business of that company, and he enters a Shirkah contract with that company.

Halal Stocks VS. Haram Stocks: Five Key Factors

Five factors decide if your investment in stocks is Halal or Haram. Therefore, before buying stocks from any company, make sure that the following conditions are fulfilled:

1. Kind of Business:

A company must not engage in any unlawful kind of business or activity. Examples of unlawful businesses or activities are Interest, insurance, and gambling.

2. Assets:

A company must not comprise only liquid assets, but should also have fixed assets, such as buildings, plants, or machinery. Otherwise, shares should not be purchased.

3. Riba-Free Funds:

Companies are usually involved in two types of interest-based transactions:

• They take interest-based loans to increase funds; or;
• They deposit their surplus in an interest-bearing account.

According to Shariah scholars, it is not permissible to purchase the shares of a company, that is engaged in interest-based dealings.

4. Elimination of Riba Income:

If, due to an unavoidable reason, a person got a dividend from such a company, he must investigate and find the income of the company that is based on Riba. And that amount must be deducted and should be given to charity.

5. Prohibition of Leverage:

As per Islamic law, the concept of leverage or borrowing money to invest in stocks is strictly prohibited. The use of leverage implies that an investor borrows money to invest in a stock, which could lead to significant profits or losses. However, this goes against the principles of Islam, which prohibits speculation and encourages risk-sharing. Therefore, investors must refrain from using leverage and instead rely on sound investment strategies that align with Islamic principles.

Shariah Perspectives on Sale, Bartering, and Intraday Trading in the Stock Market

1. Sale Without Possession:

Sometimes people buy shares, and then sell them onward, without taking their delivery. However, Shariah doesn’t permit the selling of a thing onward, before taking its possession. Regarding the “Possession of Shares”, it is important to understand that:

• Share Certificate is a piece of the payer;
• The actual “Share” is one’s ownership in a company; and;
• One becomes the owner of the share and can sell it, only after the risk has been transferred to him.

2. Bartering:

It is commonly practiced to buy and sell shares. Bartering is also a way of financing, which is not permissible in Shariah for the stock market.

3. Is Intraday Trading Halal?

The question of whether intraday trading is halal or haram under Islamic law has been a contentious one, as it involves the buying and selling of securities within the same day. According to the majority of scholars, Intraday trading, Futures, Margin Trading, and Futures are prohibited, because they promote speculative practices and discourage ethical investing.

Zakat on Stocks:

Shares are usually purchased for two purposes: To Gain Capital, and To Earn a Dividend. Zakat payable on shares depends on the purpose of its purchase.

1. When Shares are Purchased to Gain Capital:

If a person buys shares only to sell them onward and gain some capital, and not for a yearly dividend, then Zakat will be paid on the market price of those shares.

EXAMPLE:

• Bilal purchases shares of a company to gain capital.
• The market price of that share is $100.
• Since the share was purchased for capital gain, it is considered as a “Commodity for Trading”.
• So, Bilal will pay 2.5% Zakat on $100.

2. When Shares are Purchased to Earn Dividend:

Suppose a person buys shares to earn a yearly dividend. In this case, Zakat is payable on that part of the market price of shares, which stands against those company assets, on which Zakat is payable.

EXAMPLE:

• Ali purchases a share of a company to earn a yearly dividend.
• The market price of that share is $100.
• Out of that $100: $60 stands against the assets; such as building, office equipment, and machinery.
• And, $40 stands against raw materials, finished products, and cash.
• Since only $40 stands against the assets on which Zakat is payable, “Ali” will pay 2.5% Zakat on $40 only, and no Zakat is payable on $60.

Risks and Benefits of Investing in Stocks:

Investing in stocks can be both risky and beneficial. On the one hand, investing in stocks can provide a source of passive income and long-term growth. On the other hand, investing in stocks can also lead to significant losses if the market experiences a downturn. Investors need to weigh the risks and benefits of investing in stocks before making any investment decisions.

Misconceptions About Stocks Halal or Haram?

There are several common misconceptions about investing in stocks in Islamic finance. One of the most common misconceptions is that all stocks are haram. However, this is not necessarily true. As discussed earlier, the permissibility of investing in stocks depends on the intention behind the investment and the industry or business being invested in. Another common misconception is that investing in stocks involves the concept of riba or usury. However, this is not necessarily true either. While some forms of investing in stocks may involve riba or usury, not all forms do.

Alternative Investment Options for Muslims:

For Muslims who are unsure about investing in stocks, there are alternative investment options available. These may include investing in real estate, gold, or Islamic mutual funds. Islamic mutual funds are investment vehicles that invest in halal businesses and industries and are managed according to Islamic law and ethics.

Summary:

Investors seeking to invest in stocks should seek guidance from Islamic finance scholars to ensure their investments are permissible. It is important for investors to carefully assess the risks and benefits before making any investment decisions. For those unsure about investing in stocks, there are alternative investment options available. Here are key points to consider:

• Shares represent ownership in a company.
• It is prohibited to purchase shares in companies engaged in unlawful activities.
• Before buying shares, consider the type of business, assets, availability of interest-free funds, and avoidance of interest income.
• People buy shares to earn dividends or capital gains.
• Shariah law does not allow selling something before taking possession of it.
• The exchange of shares through bartering is prohibited according to Shariah.