Investing in Stocks, Options, and Futures in Islam
Submitted by Raph on Sat, 2006/12/02 - 00:29.
Hey readers =0) I tried posting the following message on IslamOnline.net, but kept getting an error message. So I figure that I might as well post it SOMEWHERE. Guess it would be okay for me to post it here in case someone is confused about the issue of halal/haram regarding stocks, options, and futures. Btw, interest bearing debt instruments like bonds are haram, and credit cards are a scam and haram as well - unless you pay them off in full every month. Regaring the ForEx, I'd say it COULD be haram (under certain conditions) because what I know about the foreign exchange is there's a lot of chart interpretation/speculation and huge leverage/margin from the broker involved in that market in order to guess Pip movement. Okay, on with the message:
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As-salamu 'alaykum. I came across some questions pertaining to the trading of stocks and options on this site, and I'd like to have something clarified.
Firstly, as a matter of disclosure, I HAVE traded and invested stocks and options in the U.S. corporations for about 3-4 years.
What I've come to realize is that there is a BIG difference between the words TRADING and INVESTING. The word TRADING (from my personal experience) suggests SPECULATIVE gains from either stocks or options in the financial markets - i.e., involving a great degree of guess work, with no real intension of actually OWNING a fractional interest in the underlying company. In other words, in my experience, this has felt more like a "halal-ified" form of gambling because the TRADER is making his decisions by looking at charts, volume, etc... (in the way an astrologer would make astro-forecasts using charts).
Also, most of the time trading/speculating leads to large financial losses anyway. So it’s not a very profitable business model to begin with, and most traders lose their entire portfolio, and get deeply into margin debt with their broker in a year or two, because it’s very difficult to be able to make 365 right/profitable decision in a year, opposed to having to make just 1. And when a trader DOES make a profitable trade, that evil Shaytaan will USUALLY get the best of him by playing with his/her emotions, and enticing them towards greed to take ANOTHER huge risk in another haram trade.
Therefore, when answering questions regarding such financial instruments you folks must take this (risk of falling into gambling) into consideration, and not just isolate haram industries/companies - i.e., those who’s products include interest or alcohol (banks, beer companies…). Of course, someone who trades (gambles/speculates) in the shares, options, or futures of haram companies/industries to begin with is doing everything wrong (Islamicly speaking), I’d say.
Second, options and futures are NOT ALL haram – based on my personal experience. I say this because options are non-interest bearing contracts that can be used as a hedging/insurance instrument for shares/stock a person already owns in a company.
Example:
You’ve owed 1,000 shares of Google (NASDAQ: GOOG) @ $100 USD since shortly after it’s IPO with the interest of owning them long term because you believed in the business model after analyzing the prospectus/industry, etc… (and not just gambling on “flipping” it for a profit), but you wanted some insurance on the downside because it was/is a young company with lots of competition from mature companies like Microsoft (NASDAQ: MSFT). 1,000 shares would have cost you $100,000 USD back in August 2004), and so you bought 10 put option contracts (LEAPS) which expire 2 years from that point as insurance. This would, in my humble opinion, be an acceptable investment in Islam. By the way, GOOG (as with all other American companies) DOES derive an insignificantly small amount of it’s profits on it’s bank balance/cash from interest, and from unexpected gains in exchange rates. So perhaps a Muslim could subtract that amount (in %) from his/her gains, and donate it in the form of Zakat???
And regarding futures, well, a hard working farmer (or a rich oil billionaire sheikh in some Arab state) might want some security of selling his crops/oil in the commodities/futures exchanges, with the intention of ACTUALLY DELIVERING the goods, and not just merely speculating/trading paper for profit. So futures can’t be labeled as 100% haram, either.
Therefore, please inform your readers of these issues. Again, I am NOT an MBA, nor do I have a CFA (I happen to be a university dropout unfortunately), and the information above comes from my personal experiences only.
Mas’Salam.
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Conditions for Trading in Stocks
Q.) Is it permissible to buy and sell stocks?
A.) A Muslim can acquire the shares of a joint stock company with the following conditions:
1. The main business of the company must be Halaal (permissible) according to Shariah. So, a Muslim cannot invest in a company whose main business is Haraam, like the traditional banks, insurance companies, companies dealing in wines, etc.
2. If the main business is Halaal, but it is involved in borrowing money on Interest or placing its funds in an Interest bearing account a Muslim share-holder should raise his voice against this practice in the annual general meeting of the company.
3. When a Muslim share-holder receives a dividend he must ascertain that proportion of the profit of the company which has accrued on its interest-bearing accounts. Then a similar proportion from his own dividend must be given by him to a person or persons entitled to receive Zakaat.
4. If all the assets of a company are in a liquid form and the company has not yet acquired any fixed assets or any stock for trade, then the sale and purchase of shares must be on their par value only.
If anyone of these conditions is contravened, the investment in a company is not permissible in the Shari'ah.
NB. The above ruling has been issued by Justice Mufti Muhammad Taqi Usmani.
investment
The topic you raised is interesting however, if International Islamic Securitization is re-written with internationally recognized codes, finance houses doesn’t need to keep a Shari’a supervisory board, therefore, most finance houses can afford to sell Islamic bonds complaint with Shari’a.
The dominance of Conventional securitization is sometime over powering and undermines the progressive approach of Islamic Securitization.
In a recent meeting with a Jewish city trader friend, he mentioned in a few years, I will be holding Quran in one hand and selling Islamic Bonds with other.
If the Oil tycoons and the formers join hands and finance a group of researchers to write international code for Islamic Securitization, the fear of Riba will diminish and traders of other faiths will be encouraged to trade in Shari'a complaint products.
I would be happy to provide further detail on Islamic Securitization if anyone wants to know more.
commenting "Investing in Stocks, Options, and Futures in Islam"
Assalamualaikum.
we can't simply channel our "haram gains" to zakat. Its sinful to pay zakat with haram money.
My advise is to invest in shariah compliant securities certified by shariah advisory council.
Thank you.
Scholars disagree
Scholars disagree with what you claim.
Check the Scholar Answers section for details.
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Muslim-Investor.com Site Admin
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