Is investing in shares halal or haram?

February 28, 2020

Common Misonception

A common misconception people have is that anything to do with the share market is haram and unethical. People also liken it to gambling.

The truth is, it is permissible when done the correct way, with the right intention of responsible ownership. 

Shares or stocks are a unit of ownership in a particular company.

Buying and selling stocks on the share market with the intention of long term responsible ownership is permissible as long as the company is determined to be halal.  

In the Quran, Allah S.W.T. says that he has made trading, buying and selling lawful. He forbids Riba (usury, interest).

By extrapolating from this verse alone, one can see that investing in the share market is permissible according to the Quran, as it requires the act of buying and selling and follows the principles of profit and loss sharing. 

Islam encourages profit and loss sharing and in the stock market when you buy a share in the company you become a part-owner in the company. 

By this ownership, you are effectively taking part in the company’s journey for better or worse. Profit or loss.

But is it like gambling?

Many people think investing in the share market is like gambling or making a bet. However, this is categorically wrong and is an assumption, not a fact. 

When buying stocks in the ASX or any market around the world you can create a Shariah-compliant portfolio (a selection of different companies). 

Your portfolio would hopefully be made up of companies that do not invest in speculative high-risk ventures, financial services that deal with interest, or haram sectors like gambling, alcohol, sale of pork, pornography etc.

These basic screening criteria, wipes out a lot of companies from the market for us. 

Companies like Afterpay have gotten a lot of attention in recent times. The share price dropped to $8 a share and rose quickly to $40. Unfortunately, it is not a halal company we would invest in. 

It is also companies like Afterpay that are the first to fall apart in a credit or liquidity crises.

Companies that are not sharia-compliant do exist on the ASX, however, we ultimately make the choice when it comes to halal companies based on sound fundamentals etc. when we invest in the stock market. 

This is the same as walking into Coles and looking at the meat section, skipping the pork area and looking for the Halal label. They sell pork in Coles, doesn’t mean you can’t buy anything from Coles.

If you look at countries which fly the banner of Islam, like U.A.E, Oman, Qatar, Kuwait and Bahrain, they all have stock markets, where it is permissible to buy and own shares. If this was a practice that was not allowed, it wouldn’t see the light of day in these countries and be written off by scholars and experts, like gambling.

What kind of trading is not halal on the share market

Simple. Doing things blindly and doing things mainly on speculation, without research and due diligence.

What does this look like?

  • People speculate to buy and sell stocks frequently, i.e. day trading and short term swing trading based on the intention of making a profit
  • People acting without knowledge of the company and the fear of missing out or the jumping on purely due to the hype surrounding a company

The day to day movements of the stock market are somewhat random, so trying to time the market and make money off the random swings is what creates the misconception that likens shares to a form of gambling. And that’s true because the action of buying and selling shares based on speculation and picking companies that aren’t ethical, is wrong. 

Islamic law views investments made on the stock market as informed commitments to responsible ownership.

Day-trading and short term trading, however, entails no such commitment.

Rather, the purpose is to move in quickly and then to move out just as quickly, taking whatever profits may eventuate.

Most day-trading is accomplished in the space of a few hours, as day-traders speculate on rising prices, hoping to sell before prices drop. And certainly, the intention of day traders is not to commit to responsible ownership. On the contrary, their intention from the outset is to sell.

They monitor the price fluctuations and they sell as soon as they have made what they consider to be acceptable profits.

When this is the intention, then whether they take a few hours, days or weeks to liquidate their positions, they are clearly not committing to responsible ownership; and their actions are clearly contrary to Shari`ah teachings.

On the other hand, someone who buys stock with the intention of committing to responsible ownership, but then for whatever reason is forced to reconsider his/her position, will not be the same as a day trader even if s/he holds the stock for a short time.

So, in this matter, like in so many legal matters, it is the intention that is the dividing line between what is acceptable or not in Islam.

Investing in halal companies by buying their shares, after diligent research, with the intention of owning them over a long period is not Haram.

At Tabarruk, we follow and teach the investment in / ownership of companies for the longer term. We are not short term traders.

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