Buying and selling stocks has been going on for centuries, and the equity or stock markets have offered some of the world’s most stable long-term investment gains. This is clearly an accessible avenue for people of all walks of life to grow their savings and help them reach their financial goals. However, some Muslim investors have stayed away from trading in shares in fear that it may contravene Islamic financial principles.
Under the right conditions, stock trading can be Halal. And because equities have been around for centuries, Shariah scholars have come to widespread agreements on how stock trading can be Halal. I want to explore this topic further because I would like to see Muslims participate in this arena and use it to their advantage just as others have done. Let’s take a closer look.
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Halal Investment—Definition & Main Rules
Halal: This simply means “permissible.” Therefore, a “Halal” investment is one that is permissible under Sharia rules.
Haram: This is the opposite of Halal. In other words, it is forbidden by Islam.
Shariah: Islamic law. It is an Arabic word meaning “the way” or “the path to water.” It categorizes all acts into five categories: obligatory, recommended, permitted, discouraged, and forbidden.
What Is a Halal Investment?
A halal investment is a financial transaction or investment permissible under Shariah law. To understand halal investing, let’s look at some key underlying Islamic finance principles:
- Islamic finance (also known as Shariah-compliant finance) is finance that conforms to the moral code and Shariah rules of Islam.
- Shariah finance sees money as a medium of exchange to buy other products and services rather than having intrinsic value itself. An extension of this idea is the ban on making money from money, i.e., interest (or Riba).
- Islamic finance also prohibits investment in goods or services that are seen as harmful. This prohibition covers activities such as the production and sale of alcohol, tobacco and gambling.
- Halal investing encourages investing in companies involved in products and services that benefit society.
- The profits and risks of a business venture should be shared as far as possible, rather than one party claiming most or all of the upside or bearing the full risk of loss.
Is Investing in Stocks Haram?
Following the logic above, buying and selling shares in companies is generally Halal. The key word here is “generally.” Where trading stocks becomes Haram depends on the underlying stock, the company’s activities and how you trade the stock.
What Stocks Are Halal?
Keep these two ideas in mind to help keep your stock trading Halal:
- The underlying company performs activities which are Halal. Remember, buying a stock means owning a part of that company, no matter how small. If I bought one share of Apple stock, I can legitimately say I am a part owner of the company (even though my share represents a tiny fraction of the company). As a part-owner, I am part-responsible for the company’s products and services. For example, the Islamic scholar, Mufti Taqi Usmani, said: “Investments are encouraged in companies that benefit society—medical advances, technology, consumer products, services, etc.”
- Buy the stock directly rather than through CFDs (Contracts For Difference). CFD’s do not involve an underlying asset, and most Islamic scholars consider CFDs to be a form of gambling or speculation not aligned with Shariah principles.
These are not the only rules that make a stock purchase Halal, but in my mind, these are the two most important criteria. The next step is avoiding stocks that are Haram because of their company’s underlying activities or other conditions.
What Stocks Are Haram?
Stocks are Haram when the company is involved in activities considered to be against Islamic principles. Several industries do not comply with Shariah principles, and Muslim investors should avoid owning stocks in these sectors:
- Gambling: e.g., casinos and sports betting companies.
- Alcohol: companies that manufacture, distribute, or sell alcoholic beverages.
- Pork products: businesses that deal in pork and pork-derived products.
- Tobacco: firms engaged in producing, distributing, or selling tobacco products.
- Cannabis: companies involved in recreational cannabis (but medicinal cannabis is permitted by most Sharia scholars).
- Adult entertainment: businesses that generate revenue from the adult entertainment industry.
- Firearms and defence: firms that produce or sell weapons, or firearms or engage in defence contracting.
- Institutions that derive a majority of their revenues from interest-based products: this includes many financial institutions.
- Companies with excessive debt: these companies potentially break Islamic financial principles partly because of the excess interest they pay to service their debts.
Shorting Stocks and Islam
Short selling stocks means making a profit on the fall of a stock price. This can be done by shorting the stock directly (the broker borrows it from another account so you can sell it and buy it back at a lower price). Or you can use an options contract, such as a Put Option, which increases in value when the stock price decreases.
Most Islamic scholars consider shorting stocks Haram for the following reasons:
- Selling something you don’t own is generally considered Haram.
- Profiting from the fall of a stock is not beneficial to society.
- When shorting stocks directly, there’s an unlimited risk if the stock price goes up, and Shariah finance prohibits excessive risk-taking.
Tips for Halal Investments
You don’t need to become an expert to make your investments Halal—there are many products and services that have done the due diligence for retail investors to help you pick Halal investments. Here are some of my top tips for the Halal investments:
1. Buy the stock directly rather than through a CFD or derivative.
2. Avoid Haram industries, such as alcohol, gambling and pork.
3. Is the company’s services benefitting society? Shariah principles exist for the betterment of society.
4. Use a Halal stock screener. Several screeners made for Muslim investors filter and rank stocks according to their permissibility.
Top tip: Invest in a Shariah-compliant index like the S&P 500 Shariah.
The S&P 500 Shariah is my most preferred way to trade stocks in a Shariah-compliant manner. This index is the S&P 500, but it only includes its Shariah-compliant stocks. A supervisory board of Islamic scholars oversees the S&P 500 Shariah index.
- The S&P 500 has a multi-decade track record of positive returns. The Shariah version can ride on the back of that.
- The index has done all the hard work of stock selection—Halal stock screening, diversification, selection process, etc.
- It’s an index fund, and most indexes outperform the active selection of stocks.
- The S&P 500 Shariah index is available as an Exchange Traded Fund, ETF for short, (listed on the NYSE under the ticker symbol SPUS).
Bottom Line
Stock trading can be Halal under the right conditions: buying the stock directly rather than through a derivative or CFD and avoiding companies whose main business is considered Haram (e.g., gambling and alcohol). However, there are plenty of Halal Stock Screeners to help pick stocks that meet the criteria for Halal investing. My favourite method is to invest in a Shariah-compliant fund, such as the S&P 500 Shariah, because it’s done the hard work for me.
