Fri, 2006/12/01 - 23:29 by Raph

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.

Investment

Comments

Visitor (not verified)

Thu, 2007/09/20 - 05:28

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.

Muslim Investor

Thu, 2007/09/20 - 09:37

Scholars disagree with what you claim.

Check the Scholar Answers section for details.
--
Muslim-Investor.com Site Admin

Visitor (not verified)

Sun, 2011/04/24 - 20:41

Do you not really understnad what the scholars say or you actually dont want to????

What the scholars say is that give away your haram income to one who is entitled to recieve zakat (i.e a poor person, etc) without the intention for reward; or dont consume it or get rid of it by all means e.g throwing it down the drain, burning it etc.

your obligation to pay zakat is based upon your halal income only.

For example if you have £1 Billion haram money, and £50,000 halal, you should get rid of £1 Billion by giving it to the poor without the intention of reward, or to burn it, etc. With that You still have to pay Zakat @2.5% on halal £50,000.

now assuming you have £1 Billion haram and only £100 halal money, you are supposed to get rid of haram by whatever means, and Zakat is not obligatory on your halal £100 since it is too little to make you sahibe nisab, infact at this instance you should be the one recieving zakat since only £100 on you, makes you poor.

abdullah Haiwad (not verified)

Sat, 2007/09/22 - 08:38

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.

Suhail Alji (not verified)

Tue, 2007/10/02 - 03:24

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.

zafar (not verified)

Thu, 2008/09/18 - 18:54

can we trade in options if we are not speculating but working on understanding of the market. There are n numbers of parameters to study the direction of the market. Islam is a progressive religion and ijtehad is allowed so if option trading does not violate the basic economic principles of Islam why it is not allowed with certain conditions? Plz guide me to the right path...

Reealjrd

Mon, 2008/12/08 - 02:34

Option trading every person can do. But the main thing that you have talked about volitaliy it cannot say when it might turn the market. I am trading this market and still i get loss.

Gordon Gecko (not verified)

Sun, 2008/12/28 - 05:44

I would just like to make a few comments to some of the posts.

1. Most of what i have seen posted on this forum appears to be coming from day traders sitting on thier PC trading via the internet. The fact is these guys have no experience, no knowldge or proper analysis to trade and that is why almost all day traders lose money.

2. What is unacceptabe about buying shares in say a company like google and flipping them for a profit in a short while. This is a ludicrous statement, this is how good businessmen make money i.e. you buy low sell high, be it peanuts, orange juice or options contracts. If you can realise a profit(you main motivation) is 2 hours so be it. Why does the elapsement of time hold a security have any bearing on its legitimacy?.

3. The concept of giving the the interest bearing proportion of any profits to zakat is rather spurious. Almost every monetary transaction in the world has interest inherent in it because most flows of money are base on large amounts of credit. Interest is haram, plain and simple, one cannot legitimise it by paying zakat on it. One could extrapolate the same logic and pay zakat for the proportion of profit based on alcohol,gambling,pornography as long as the company did not solely deal in these areas.

4. Justice Mufti Muhammad Taqi Usmani. mentions:

"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."

This shows a rather glib understanding of modern economic models or practices. Almost all businesses conduct transaction on lines of credit from stock purchasing, to pay the wages of employees. A brilliant illustration of this reality has been seen in the present credit crunch. As banks stopped lending, giants like GM motors, ford,chrylser are literally running out of money and going under. The fact is there exist a lag between sales of goods and realisation of profits hence to continue day to day business companies need to borrow money. Even a small coner shop buys stock for sale before he has the profits of the last sale.

Visitor (not verified)

Fri, 2012/03/30 - 13:41

This is a very interesting post and verbalises a lot of issues that I have been thinking about myself. I think that we need to first understand how the global economy works. It is almost impossible, regardless of how you make your earnings, that it does not have some element of credit interest in it

MKirk (not verified)

Wed, 2009/01/21 - 23:57

I have been asked by one of my Muslim friends if he can be a futures broker in undeliverable commodities and contracts like stock indexes etc. Can my Muslim friend personally accept payment arisen from the brokerage charged to his clients who are trading such products. This is trading and speculation as opposed to investing.

many thanks

Sparkle (not verified)

Sun, 2009/03/08 - 17:30

I am a software engineer. My Company Builds Stocks/Options/Futures Trading System for US markets. I am working for them for last 8 years.

From the information on this forum and other related websites, It seems like trading in stocks/options/Future is not 'totally' Haram, but 'conditions' apply.

While we build software in our compnay we do not know that how this trading software will be used.... (since the user of our trading apps are non-muslims so we assume they may do 'prohibited' part of stocks/options/future trading as well using our systems).

My question is, my earning is HALAL or HARAM? or.. can i dedicate a specific portion of my earning in zakat/sadqa as i noticed some scholars mentioned that.

and if its all Haram then should i just quit this job/domain and start finding another domain-restart- and spend another 5 years in doing so ?

Thanks.

Visitor (not verified)

Tue, 2009/10/20 - 09:30

Salam

With all due respect, define interest in islam. As far as I know monetory system has changed fundamentally since the early days of islam. All business as far as I can see is somewhat speculative. You study charts, facts and figures and see a margin. Its true for any sensible businessman investing in any business. Most of the Islamic scholars(not all!) might be the best experts in religion, but have idea about moderen financial system. Hence there judgement is somewhat tainted. We need people who know what they are talking about. I dont think any one misleads us intentionally, they just dont know what they are talking about. I would like to see a detailed description of "interest" in early islam time from reliable resources and than decide for my self why it was banned or if todays financial instruments bears any resemblance.

May Allah protect us from half scholars and doctors.

mdvasi

Mon, 2009/11/16 - 02:42

Assalamu Alaikum warahmatullahi Wabarakathu,

I have been trading in Equity for sometime and then started trading in futures.
I don't know how if there are different types of futures. The Futures which i am trading are of the same companies whose equity shares i used to trade with.
And very important that many people make a mistake thinking that Futures and Options are same, but they are not the same, Futures Trading is different and Options Trading is different, although there might be some similarity.

This is what i have come to know about Futures trading:
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1. In Futures trading, there is fixed no of shares which is called a Lot with which we need to trade with.

2. Like for Example here in India we have a company called Tata Motors, and say that for Futures Trading Tata motors has fixed a Lot size of 1000 shares per Lot, so 1 Lot = 1000 shares.

3. so if the value of 1 share is Rs.100 then the value of 1 Lot is (Lot size x value per share)
i.e 100 x 1000 = Rs.100,000

4. If we need to buy a Lot in Futures then we need to pay only a part of the amount which is decided by the company or the securities board.
(i am not sure about who decides the payment amount)

5. If 1 Lot of Futures of Tata Motors is Rs.100,000 and if the part of the amount required to buy the Lot is say 30% of the total Lot amount then in this case we need to pay only 30% of Rs.100,000 i.e Rs.30,000

6. In Futures, for every Lot we deal with there is an expiry date before which we need to buy/sell the Lot or close the trade.
i.e if we have bought a Lot then we need to sell it before the expiry date, and if we have short sold a Lot then we need to buy it before the expiry date.

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Selling before Buying:
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Many People say that we should not sell ANYTHING before buying it or unless we possess it.
I don't know what is the basis for this, but for me in the Hadiths which i have come across mention that it is prohibited only in edible items. i.e selling before buying is prohibited only in eating and drinking items.

Few Hadith References:
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1. Shahi Bukhari,Hadith 343. Vol 3, Book 34. Sales And Trade:
Narrated By Ibn Umar: The Prophet said, "He who buys foodstuff should NOT SELL it till he has received it."

2. Shahi Bukhari,Hadith 346. Vol 3, Book 34. Sales And Trade:
Narrated By Ibn 'Umar: The Prophet said, "The buyer of foodstuff should NOT SELL it before it has been measured for him." Isma'il narrated instead, "He should NOT SELL it before receiving it."

3. Shahi Muslim, Book 10. Business Transactions. Hadith 3640:
Ibn Abbas (Allah be pleased with them) reported Allah's Messenger (may peace be upon him) as saying: He who buys foodgrain should NOT SELL it until he has taken possession of it.

4. Shahi Muslim, Book 10. Business Transactions.
Hadith 3640:
Ibn Abbas (Allah be pleased with them) reported Allah's Messenger (may peace be upon him) as saying: He who buys foodgrain should NOT SELL it until he has taken possession of it.

5. Shahi Muslim, Book 10. Business Transactions.
Hadith 3646:
Ibn Umar (Allah be pleased with them) reported Allah's Messenger (may peace be upon him) as saying: He who buys food-
grain should NOT SELL that before taking possession of it. He (the narrator) said: We used to buy food-grain from the
caravans in bulk, but Allah's Messenger (may peace be upon him) forbade us to re-sell that until we had shifted it to some
other place.

And above all Allah knows best.
May Allah guide all of us to the right path and Halal, and save us from the haram.
-------------------------------------------------------

I request the readers to pls provide ur insights, thoughts and feedback for the info which i have provided
here.

Assalamu Alaikum warahmatullahi Wabarakathu,

Visitor (not verified)

Mon, 2013/04/22 - 02:58

Salam alaikom ,

i liked your comment , and i just want to share with you this clip about margin trading from Canadian sheikh, who got master of islamic finance .

for me some of his reason is not acceptable ,

http://www.youtube.com/watch?v=F_WQUX5ynGs

Usman Khan (not verified)

Thu, 2010/07/08 - 14:17

Assalam to all,

I have confusion about working in equity brokerage house as a financial research analyst, as brokerage house usally earn their income from margin financing(interest on loan to investors), speculative trading and investing client money on stocks like bank's which are not permissible by islamic scholars,
can an individual work as an broker's employee and get the income from them, isin't it the same like working in banks or insurance which are not permissible? Looking for the expert response.

Thanks.

M. Ahmed (not verified)

Sat, 2011/03/05 - 11:23

As i do trading in future and options can i do it? I am Confused as some muslims says that trading in future and options is haraam is it true. Please guide me as i mostly do trading in future and options only.

Visitor (not verified)

Thu, 2011/09/08 - 14:03

Just wanted to post the interesting article i found after a lot of research. Hope Allah will guide you all.... It is 100% haram and there is no doubts about it. if you are interested to know more, plz watch in youtube forbidden transactions video and riba in islam....

Is futures trading halal or haram? Futures trading isn’t just for investors–even day-to-day transactions like buying and selling fruit, furniture, or funky gadgets can take the same ruling!

So is it halal? Or haram?

What exactly are futures? Futures trading generally apply to stocks, indexes, etc. Say you’re trading currencies (such as the Japanese Yen). Normal trading is buying high and selling low; futures trading is “I’ll sell you 1000 Yen at this price, two months from today, and you pay me then.” An option to buy later at a specific price guaranteed now, which you pay for later.

For the sake of simplification, you can consider it as a contract to buy furniture from your aunt, who buys and sells antique furniture. She tells you “I’ll sell you an antique wooden chest next week for $350. Pay me next week.” That’s what futures is.

How does it measure up, Islamically?

Selling what you don’t have possession of: Futures is generally a debt-inducing contract; the buyer sells you something they don’t have (but intend to buy at a cheap price). Sometimes, the commodity being sold doesn’t exist, and it may exist later on (at the date of the contract). In either case, the buyer is selling something that they don’t own! And that’s not permissible in Islam!
Debt for debt: Even if you own the commodity in the exchange that you’re selling (or buying) in a futures contract, it becomes a debt for a debt. You owe some money, and the seller owes some commodity. Again, not permissible.
So how can we make a futures contract halal? How can we tackle these issues?

Buy and sell what exists. Make sure that, whatever the commodity is, be it stocks, or currency, it already exists in the world.
Make it a promise, not a transaction. If you consider the deal a legally binding transaction, then it’s haram; but if it’s just a promise to buy at a later date (spiritually, but not legally, binding) then it becomes permissible. Practically, this means you CAN (but shouldn’t) back out of the deal when the time comes; and that you cannot take to court, in an Islamic system, the other party.
Pay a deposit. Another solution to the debt-for-debt transaction is to pay a down-payment up-front; at least then, something has exchanged hands, and it’s not a debt-for-debt transaction anymore, but a proper, legally-binding transaction.
No reselling. If you bought a futures contract and paid money, that contract entitles you to some commodity. Can you resell that commodity? No! Because you don’t physically have possession of it!
However, why are futures haram? One of the goals of shari’ah is to prevent thulm; and with futures, the wisdom of prohibition may be around not being able to provide what you sell — if you promise someone you’ll sell them something, and you can’t deliver, then what?

There’s a relevant hadith about a man who came to rasulullah (salallahu alayhi wa sallam) and said: “People ask me to sell them things I don’t have. Should I say yes, and go buy them?” and the messenger of Allah (salallahu alayhi wa sallam) said, “No, go buy them first, and then sell them.”

On the other hand, he (salallahu alayhi wa sallam) permitted farmers to sell their future crops before they were planted! You might say, “What the?!”

Look again at the wisdom of prohibition — not being able to provide what you don’t have. In the case of farmers, they are capable of providing it (albeit at a somewhat uncertain quality or quantity), and the money would help them now to generate crops — so they are exempted from the prohibition of futures.

And from this hadith, scholars derive a rule: if you are a primary producer or manufacturer of an item, you can sell it before it’s manufactured or produced. So the issue of house builders selling houses based on blueprints? It would be permissible insha’Allah.

But you can’t resell that!–Because you’re not the primary manufacturer!

And that’s futures contracts, in a nutshell. To summarize:

Don’t deal in futures. It’s a fickle thing. Especially if you don’t understand the fiqh.
Consult your local (knowledgeable) imam. They can tell you what to do.
You can initiate futures contracts, provided the commodity exists and the seller possesses it.
Give or pay a down payment, to avoid a debt-for-debt transaction.
Wallahu ta’ala ‘alam.

References
Shaykh Tawfique Chaudhry. The Real Deal. University of Toronto, Toronto. 08 Jan. 2009.

Curios (not verified)

Thu, 2013/03/07 - 23:04

Salam,

I appreciate your insight on this matter. However, I do have a question regarding one of the matters:

"Selling what you don’t have possession of: Futures is generally a debt-inducing contract; the buyer sells you something they don’t have (but intend to buy at a cheap price). Sometimes, the commodity being sold doesn’t exist, and it may exist later on (at the date of the contract). In either case, the buyer is selling something that they don’t own! And that’s not permissible in Islam!"

What if I am to buy things which are not available yet. In other words, I am ORDERING things and the seller will get them from somewhere else and no fee or deposit involved when ordering. Is it permissible? And if deposit is involved, will it changes the ruling?

Thank you.

Visitor (not verified)

Tue, 2013/10/15 - 12:44

Can I work in a company dealing in futures and options. Will my income be Haram or Halal.

MM (not verified)

Wed, 2012/03/21 - 19:16

Assalamoalekum Warehmatullah, I believe I owe this to all my Muslim brothers and sisters or any honest common man and that is why I am writing on this thread. I want to reveal here that I worked for 20 months day and night (as much as an individual can work (24 X 7) on U.S. futures market as an independent trader. I was introduced by someone I knew and I trusted him enough to believe that there is profit and loss in this market, so with equal risk it is indeed Halal contrary to the popular view of the Islamic scholars. I entered this market with a hope and urge that I would make an earning initially and later thought that I would make big money from it. Days, weeks and months of testing and reasonably huge monetary losses took me to a position where I understand this market inside out today and can make as much money for myself and probably anyone who I bring and follows my model but you know what-there started a real fight within myself and I could easily feel that something was not right. My model had reached the position where I wanted to be but my heart, brain and if I can say soul were not in sync at all. All sorts of thoughts started pouring in and the strong reason that I found for it was that there is a very clear manipulation in this market on a day to day, hour to hour or minute to minute basis and it has been designed in such a way that an individual trader like myself who comes in assuming it is honest is bound to end up in losses and that is the reason there is proven data that 90 percent of people lose in this market. Let us assume that you are very smart like I thought I was, you will learn/find/explore the tricks but when you will gain someone has to lose (he/she would be like you and me who enter with little know how). A question was raised within and I share with all of you that if you and me are practicing Muslims and we find that there is a street where people are robbing or trying to rob anyone on that street-will we go and join the robbers or will we go and support and save who is being robbed. Also picture that the robbers have power and may be you can't overcome them but you can join them-would you and me join them still or at least make Dua or whatever we can to the best of our ability to save the innocent. I think if we claim ourselves to be Muslims and believe in the Day of Judgment the answer is very obvious that we will not participate in anything that is remotely wrong. As this is just a reply on a thread I am concluding it here and I hope Inshallah that this would be an eye opener for anyone who is thinking of entering futures market or has entered it or has made a successful model. Please remember that it is only our Aamaal that will go with us, everything else that we created here-we will leave so only create what is beneficial for the mankind and not anything that brings more harm and evil. May Allahtala allow us to implement more than we say and May we be protected from the evils of Shaitan-Aameen. If anyone of you has any more questions Inshallah I will answer them very honestly-you can email me at ottawakitchen@gmail.com

Visitor (not verified)

Fri, 2012/01/27 - 23:16

Some Simple rules:

*stocks, commodities, and spot currency trading is allowed.

*futures, options, and selling anything else that you do not currently own is HARAM.

If in doubt ask a Mufti.

Salam

Visitor (not verified)

Mon, 2013/04/22 - 02:57

Salam ,

what about Buy al-salam contract in lslamic finance ?
this is haram also ?

MOHAMMED QUASIM (not verified)

Fri, 2012/03/30 - 22:55

THERE ARE CONTRADICTORY INFORMATION/OPINION BY MANY PEOPLE ABOUT FOREX TRADING HALAL OR HARAM
I REQUEST A SHARIA BOARD PARTICULARLY ISLAMIC BANKING SHARIA BOARD TO CLEAR THIS POINT IN ORDER TO GUIDE MUSLIMS AND PREVENT THEM ENTRERING "NAAR JAHANNUM" IF FOREX IS DECLARED AS HARAM. I WILL BE VERY MUCH PLEASED IF ANY ONE GUIDE ME RIGHT APPROACH

Visitor (not verified)

Sun, 2012/10/07 - 00:21

What if I buy option on a stock and then not sell the option but take delivery of stock and than sell the stock. Is it permissible

Visitor (not verified)

Wed, 2014/05/14 - 21:11

Dear Brother,

Anything which involves margin from the broker in trading is haram