What is Halal & Haram in Stock Market ?

[muslimsforum]

Investing in Stock Market is a highly debatable question. While some Scholars consider it to be halal, some do consider that it is haram. We at Muslims Forum consider investing in stock market is permissible under some conditions and impermissible in other conditions. We have build this opinion based on our intensive research in Islamic Finance, and our education in MBA Finance and over 15+ years in direct business management which includes Share handling of the company.

Basically, there are two types of investing in Share Market.
(i) Long term investment in Shares
(ii) Trading like Intraday or quick buying and selling of Shares to make profits from share value fluctuation

Halal Investments is not just about taking interest or not investing in haram products. The concept of Halal Investments is to safeguard the money invested in business. There can be losses, but ultimately the company will see the profits. The investors are supposed to keep patience during the loss and enjoy the profit.

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Let's understand the Halal Business in a simpler way. I opened a Retail Store and invested an amount of Rs. 1 Lakhs in it along with some investors. I do daily selling. Some days, I sell more products and some days I sell lesser. Further, I sell perishable products like Vegetables, milk etc. Sometimes I couldn't sell these products and they expire quickly. Which is loss to me. But I have to bear it in order to do business. And recover that profit from other products.

Now say, in a month I am unable to sell properly and I have to take a loan to payoff my employees and rents. In this particular month, I couldn't give profits to my investors. The obligation on Investor is to wait for this month and support the business without taking profits. Infact helping the Store with some investments or interest-free loan.

I recover in the next month and could sell the products again. I now again have profits and given back the loan amount and started giving profits to the investor. This is how an ideal business works. In this case, the business is in total control of the manager, despite losses, he can get back his profits.

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Now coming to stock market. The first option (i) Long term investments work as such given in example. Hence it is permissible to invest in such long term investments and earn profits. However when it comes to second option (ii) Trading of shares, it is impermissible to invest in such short term shares. Why ?

Here's why trading is impermissible. In trading, you earn profits or losses based on fluctuation of share prices. If you win, you earn and if you lose, you lose money. The money you lost is totally out of your hand. You can't recover it unlike in ideal business. This is just like gambling. In a halal business, your money is always in your control. Some losses and delays happen, but you can regain profits in the long term. But if the money is completely out of your hand, then you can never get it back.

Islamic Finance and Halal Investments main focus is to build stability and security of your investment. Where as trading of shares is totally against it. Moreover, in the conventional markets, we usually hear the term "share market obsession". Most people invest in share market with the obsession to make quick money. And unfortunately lose money. In our practical experience we have seen many people who invested in short term share market trading's and lost huge amount of moneys. Islam is strictly against such obsessions, which give you quick profits or losses. Islam is about investing in long term and with stablity.