Tuesday | 16 April 2024 | 7 Shawaal 1445

Fatwa Answer

Question ID: 1055 Category: Dealings and Transactions
Stock Market Investment Short term/Day trading

I want to Invest money in Shares/Stock of a company who DOES NOT deal with Finance, Alcohol, Entertainment or Manufacture/Sale/Market Prohibited Goods/products in Islam.
However, most of the companies are directly or indirectly tied to a Bank for their Financial needs who ultimately deals with Interest or Riba is it permissible to invest in such Company?

 I read one of the Q&A on website

The purpose of buying and selling of the shares should not only be balancing the mutual difference in which there is no  possession rather its purpose is to become partner in that company and get its annual profit.

Does this mean Short term/Day trading is prohibited and long term investment is permissable if conditions are met? 

Please correct me if I am wrong, I do not have possession of company assets when I buy shares short term or long term does this invalidate anything under Islamic law?

Jazak'Allah Khair

الجواب وباللہ التوفیق

Purchase of shares from the stock market is allowed provide the below conditions are satisfied:

1. The company whose shares are being purchased, must be dealing in legal (Halal) business. For example it:

  1. shall not be a bank dealing in interest.
  2. shall not be an insurance company involved in gambling and interest.
  3. shall not be in the business of liquors. 

2. The company must have in its possession some of its assets in Fixed Status. The entire assets shall not be in the form of cash money.

3. If the company deals in interest based transactions by:

  1. acquiring bank loans on interest to increase its funds and runs its business with it.
  2. or deposits its surplus money in a back to benefit from accrued interest.

It will then be incumbent upon the share  holder to raise his voice against such illegal practices during the annual meetings of the company and announce his vindication (bara’at) from interest based transactions.

4. At the time of distribution of profits, the profit incurred through interest-based account deposits, should be estimated from the income tax statement, and that illegal money must be given out in charity (sadaqa), but without the intention of any reward from Allah (SWT).

5. The purpose of trading in shares should not only be to bridge the difference among yourselves without ownership, but the sole purpose is to become a partner and obtain your yearly share of profits.

The intent of a large number of people in this kind of trading is not for the ownership of those shares and their possession, rather they try to bridge the difference among themselves, which is identical to the ill practice of gambling.

Accordingly, they review various company profiles   to guess the rise in share prices and start buying their shares.Thereafter when prices of those shares go up, they sell those shares and get the profit. That becomes their main purpose in buying shares. 

Let it be clear that purchase of shares under this pretext and taking the profit without assuming ownership of the shares is absolutely illegal and “haram”.

(فقہی مقالات:۱/۱۴۴)

Through the extensive details given above, you must have known that the legitimacy and illegitimacy of this kind of trade does not depend on short or the long term business, but in fact it is first of all the possession of shares, their delivery and the transfer of risks.Therefore, even with a short-term transaction, if the possession is ensured and other specified conditions are guaranteed, sale of those shares will be legal.

Your assumption that you do not have any kind of ownership in company assets is incorrect. 

Religious Scholars are of the opinion that the share holder having purchased shares, does in fact own the assets of the company and is a partner in proportion to the value of his shares. That is why if the company dissolves for any reason, the share holders receive their shares from the company assets according to their individual percentages of shares.   

 فقط واللہ اعلم بالصواب