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Understanding Riba and Gharar

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Tue, 2002/02/05 - 12:00 by Muslim Investor

The following question and answer by Sheikh Yusuf Talal DeLorenzo attendees of the Dow Jones University Courses on Islamic Investement.

Question:: In the topic of Gharar, could it be safe to say that investing in the stock market is Gharar? There is a certain amount of risk involved in investing in the stock market without any assured returns so does this qualify as Gharar?

Answer: In section five of Lesson Two I wrote:

"Obviously, if we equate gharar to uncertainty and risk, then these are thingswhich occur in the normal course of doing business. When we look to the examples fromthe Sunnah, and to the definitions and examples given by the jurists, a more coherentpicture emerges. Clearly, the prohibition is related to the Shari`ah's insistence onfair and ethical dealings, and on its lack of tolerance for unjustified enrichment."

Now, investing in the stock market, through the purchase of stocks, is not gharar.When you buy stocks, you buy them at a certain price, and in return you receive a shareof ownership in a company. Each of the elements in this transaction is clear and unambiguous. So there is no gharar. But when people think of the stock market, they always think of prices rising and falling, and of people making, or losing, fortunes! Unfortunately, when they think in these terms, they lose sight of what is really going on. The stock market is no different from any other market; at least not in its essentials. But, yes, it is more sensational. So, if you buy a car today, and sell it three or four years from now, there will be a difference in the "market value" of your car. Likewise, when you buy a home, and then sell it twenty years later. Or when you buy a corner grocery store. Or a franchise. The market will dictate the price. But the important thing is that the contract of sale will be straightforward and without ambiguity. If it is, the element of gharar will be absent and the deal will be lawful.

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