The following article will answer whether investing in stocks is haram or halal. It will also go over the main rules of Islamic finance and discuss what stocks are haram and halal, and offer guidance on halal investment.
Main rules of Islamic finance
There is a set of rules that all Muslim traders must follow, including:
- Forbidden to invest in a company that earns many profits from haram practices like gambling, selling alcohol, insurance, weapons, pornography, etc.
- Avoid making any investments that pay interest. Fundamentally, any enterprise whose operations go against the fundamental principles of Islam is regarded as haram.
- Forbidden to invest in businesses whose haram revenue is more than 5% of the total revenue. Many also refer to this as the “5% rule”.
- Investing in the shares of companies with extremely high debt is forbidden.
- Muslims who trade must take a cut of the gains and losses and pay no interest.
- They must assess each firm’s investment activity in advance to determine whether its operations and financial reports are halal.
- Bonds and investments with an interest component are prohibited.
- Companies are considered haram if they have an average annual total debt-to-market cap ratio of more than 33%.
- Companies that, on average, over an entire year, have more than 45% of their assets in receivables are prohibited.
Remember that halal investments can vary significantly since Islamic law’s application to commercial operations necessitates many nuances. There are several standards as well. Moreover, avoiding haram commercial activity is not always achievable.
Is investing in stocks haram?
In most situations, purchasing stocks is not considered a haram practice. The majority of Islamic scholars deem investments in stocks as halal. However, there may be specific scenarios where certain stocks may be regarded as haram.
What stocks are halal?
Halal industries refer to industries that follow Islamic law. Here is a list of them:
- Real estate;
- Home goods and furniture;
- Transportation and shipping;
- Furniture and home goods.
Therefore if the stock you choose lies within any of these industries, it is highly likely that they are halal.
What stocks are haram?
Companies within certain industries may be practicing against Islamic law. These companies may be regarded as haram to invest in. Here is a list of a few such industries:
- Nightclubs and hotels;
- Banks practicing “riba”, which means unjustified lending;
- Insurance companies.
Most Islamic scholars would see the industries mentioned above as haram or forbidden. Other industries, however, are slightly more complex and somewhat haram. For instance, a manufacturing business operating independently may follow halal principles but have an interest-based account supported by riba loans. This business would be categorized as mixed and can be challenging to classify. Generally speaking, many Muslims avoid these mixed-race businesses out of caution.
It’s crucial to avoid doing business with any organizations that engage in practices or acts that conflict with Islamic law.
What do the Islamic authorities say?
Islamic investment regulations begin at the Shariah Board — a team of Islamic scholars and experts who discover investment solutions and assess their compliance with Islamic law. The board will often exclude investment goods that make a substantial portion of their earnings from the sales of alcohol, pornography, gambling, military hardware, or pork.
According to a study on the connection between investing and Islam, Islamic law infuses all spheres of human life, including finance, economics, government, law, and politics, and its essential constituent parts, religious, social, and ethical aspects, including social justice and values. The rules for stock markets are already established in essence by Shariah, as Islam prescribes every single area of a believer’s private and public interests.
It is the responsibility of trained jurists to extend these principles, draw pertinent judgments from them, and implement them to market-specific circumstances, just like in other fields of Shariah. Although investing in the stock market is permissible in Islam in theory, Shariah establishes some regulations and restrictions that help separate the conventional stock market from an Islamically compliant one.
Shorting stocks and Islam
Under Sharia law, short selling of shares is prohibited. The primary reason is that the short seller borrows the stock rather than owning it.
Halal investment guide
Here are a few tips that Muslim traders can follow to ensure they are conducting halal investments at all times:
- Always pay taxes and abide by the trade laws.
- Put your funds into the appropriate businesses that don’t promote gambling, make alcohol or manufacture cigarettes.
- Refrain from treating trading as a significant wager. Use less leverage, and follow risk management guidelines.
Following these rules will help you avoid haram in trading.
Halal investments and Forex
Foreign exchange investments are regarded as halal by Islamic law. However, the firms should follow halal stock trading principles to be deemed halal. For instance, Muslim forex traders will be prohibited from trading shares of companies involved in gambling or alcoholic beverages.
Since forex trading uses swap-free trading accounts, it is free of interest. Several brokers provide swap-free brokerage accounts that don’t impose or pay interest when open positions are held.
Is forex trading haram or halal?
In most cases, forex trading is regarded as halal. Forex trading has no interest component, and trades are often made in person. Moreover, trading in currencies and commodities does not violate Islamic principles.
What is an Islamic (swap-free) account?
Muslim investors can open an investing account that is swap-free and in thus accordance with Islamic law. There is a particular account for those who can’t use swaps due to religious beliefs. Swap-free accounts, primarily based on foreign currencies, don’t allow rollover interest for overnight holdings.
Islamic swap-free accounts comply with the exact trading requirements and service agreements as the other accounts a broker provides, except that they are swap-free. For contracts lasting over a day, these accounts do not charge interest and often have no additional fees. Moreover, the broker would not collect rollover charges for contracts that continue longer than a day.
What about CFD trading?
Forex might be seen as halal, but most Islamic scholars would regard conventional CFD trading as haram. CFD trading does not include product ownership. Instead, the trader must forecast a commodity’s value without holding stocks. In Islamic law, this would theoretically be deemed riba and forbidden. As it happens, CFD traders utilize stock value as leverage to generate returns, which is prohibited in Islam.
Yet there are several workarounds for this. If Muslim traders utilize swap-free accounts, they may be able to engage in halal CFD trading. These accounts are intended to stop users from receiving or dispensing any kind of riba.
Frequently Asked Questions (FAQs)
Consider a few more issues related to investment and trade in the Muslim world.
Is buying Bitcoin against the law?
Islamic scholars disagree on whether an investment in Bitcoins is permissible. Some contend that Bitcoins are not a form of money and should instead be viewed as speculative investments. In contrast, others assert that Bitcoin’s decentralized nature and underlying technology make it a legitimate form of capital.
Is investing in CFDs and FX regarded as halal?
Forex trading will be considered halal. Trading CFDs is generally considered haram, but the trades can be halal if the account holder registers swap-free accounts with a trusted broker.
Is it challenging to comply with Sharia?
Generally speaking, stock investors solely investing in halal-certified companies and sectors are entirely secure. Achieving compliance is simple as long as the company or industry isn’t engaged in alcohol, pornography, gambling, interest, pork manufacturing, or insurance.
The bottom line
Now that you know the distinction between halal and haram investments, you can start your trading journey. It is important to remember that you can’t engage in businesses that manufacture items prohibited by Islamic law. You must also avoid companies that earn most of their revenue from interest, which would be deemed riba.
Trading involving forex and CFDs is authorized if the person has a unique Islamic swap-free account with a reputable brokerage. Investments that pay interest are prohibited. You can invest in anything you choose, excluding these factors. Lastly, if a business has a portion that is haram, you can balance out their support of that portion by giving the revenues made from that portion of the company to charity.