Trading FAQs – Page 30

It can be difficult to decipher what is halal and what is haram when it comes to trading in the markets. The concept is not exactly black and white as there are different areas that have different laws regarding them. So, is trading haram in Islam? No, as long as it is not done in a way that is considered gambling and there is no interest component to it, trading is not considered haram in Islam. Instead, it is considered halal. In Islam gambling is expressly forbidden, sometimes making it difficult to figure out if trading is haram since there is no guarantee that you will make money when you trade in the markets. The type of trade and what you are trading also comes in to play since there are many stocks that would be forbidden in Islamic law because you would be owning a piece of something that is haram. The Concept of Halal, Haram And Sharia Law In Islam In Islam, the concept of halal is something that is allowed. In Arabic, it translates to “permissible or lawful” so if something is halal is it acceptable within Islamic law. On the other hand, haram is the opposite, meaning that it is unacceptable, and translates to forbidden. So, if something is haram then it is unacceptable within Islamic law. Both halal and haram are part of Islamic, or Sharia, law, which governs the Islamic tradition and religious beliefs. These generally come from the religious book of the Quran. A lot of how it is looked at is through intent. If someone is trading to get rich quick and is not using it as a viable business venture, then they may be considered in violation of the Islamic law and it would be considered haram. In order for the trading to be considered halal, it must be done in a conscientious manner where the goal is to own the stock for a long period of time and that there is no interest involved in the purchase of the stock. Generally, things that are considered haram are those that are not good for a person and are thought of as sinful. These can include activities such as gambling, drinking alcohol, eating certain meats, hurting one’s self or others. Other things can also be considered haram based on intent and doesn’t have to only be the person expressly performing the bad deed but anyone who may support them in doing it, either exactly or through moral support. Sharia And Trading Financial Instruments Figuring out whether or not trading is haram or halal under Sharia law can be difficult and confusing given the nature of trading. On one hand, trading can be a good business practice, say if you are investing in good companies for the purpose of retirement like in a 401k. This type of trading is considered halal and would be permissible under Sharia law. On the other hand, if you were to get into trading to try and earn a ton of money quickly this would be considered haram since it is out of a motive of greed. Also, what you invest in can have bad consequences if you are investing in a company that is considered haram, for instance, an alcohol company or a nightclub. Since these are considered haram because they are sinful under Sharia law, therefore the act of investing in them would fall under that same category. Trading Activities That Are Halal Trading activities that are considered halal would be the trading or investment in stocks, business, real estate, and cash. That being said, stocks can be tricky because there is an element of unknown with how the stock market may perform and is very close to gambling. You must research the companies that you are deciding to invest in very carefully in order to make sure that they are considered halal. Additionally, particularly with trading stocks, make sure that the shares you trade are the common shares and not preferred shares. This is because preferred shares have an element of debt to them which is considered haram. Trading Activities That Are Haram The trading activities that Islam prohibits are those that are investments in forbidden sources such as anything dealing with alcohol or tobacco, gambling, certain food industries, adult entertainment, production of weapons of mass destruction, and cloning. There is also an element of intent when it comes to trading activities that are prohibited. For instance, if your sole purpose is to get rich quick and you are not performing your investments in a business-like manner or if you are in some way trying to get around Islamic law to get what you want by exploiting a loophole, your trading activities would be deemed as haram. Trading Activities That Can Be Either Halal Or Haram When categorizing different trading activities as halal and as haram, there are activities that fall in the grey zone between halal and haram. The most important of these we already discussed above, which is the intent. While a specific action in itself may not be considered haram, if the intent is bad then it is not halal. Before we used the example of only investing in order to make a quick buck instead of investing for the long haul to better your life down the road. Since this takes on the element of greed it is considered haram, however that intent may only be known by the individual unless it is extremely obvious. There is also a lot of debate that goes on as to what may be considered halal and haram when it comes to trading, but again it usually has to do with intent which is something that is difficult to govern. Is Trading Stocks Haram? Or Is It Halal? Stocks are among the most widely traded financial instruments, hence, whether investing or trading in stocks is considered haram is one of the first questions that crosses investor’s mind. Trading stocks in itself is not considered haram however the type of stock that is being invested in can be considered haram based on Islamic law. Since Islamic law prohibits the use of alcohol as well as participating in gambling, the ownership of such companies would be forbidden or deemed haram. Anything which is considered to be sinful would then also be considered haram if the company participates in the production or selling of those products or services. Stocks that would be considered halal include: Real estate Manufacturing Technology companies Clothing companies Shipping Stocks that would be considered haram include: Alcohol Gambling companies or investors Nightclubs Adult entertainment Is Forex Or Currency Trading Haram? Or Is It Halal? Just as with trading any other security, there is no definitive answer as to whether Forex trading is considered haram or halal. Instead, the answer to this question would depend on your intentions and the methods that you engage in for trading currencies. In Islamic law, it is considered haram if you are only thinking of wealth, being greedy, and aren’t looking to conduct yourself in a pious manner. Trading Forex is considered halal and not haram in Islam, as long as it is treated like a business and there is no interest involved. However, if one treats Forex trading like gambling or engages in interest swaps, it would be deemed as haram and is prohibited under Islamic law. To further expand on the above, trading Forex may be considered halal when it is done in a business-like manner and not treated as gambling, or a way to make quick money. In order for it to be considered halal, you must make sure that you have calculated your risk/reward and that you know what you are getting into. Contrarily, trading Forex can be considered haram if you are trying to make money through a sense of greed or are recklessly willing to lay down money in order to try to get rich quickly. In Islamic law, the intent is looked at much more closely than is the actual trading. Hence, this is something that usually only the individual trader can manage unless it is extremely obvious to others. Is Trading Bitcoin And Other Cryptocurrencies Halal? Or Is It Haram? Bitcoin is “is a decentralized digital currency without a central bank or single administrator and can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries”. This very nature of cryptocurrencies makes deciding whether trading them is halal or haram quite difficult. Bitcoin and cryptocurrency trading is considered halal when a trader fully understands these assets and trades them like a business. Contrarily, if one trades these assets without fully understanding them, such actions would be deemed parallel to gambling and considered haram in Islam. That being said, the categorization of bitcoin and cryptocurrency trading under the halal and haram buckets has been a topic of hot discussion among Islamic law experts. To some experts, using and trading Bitcoin is the same as any other stock on the market. These experts suggest that investing in Bitcoin would be considered halal if you are doing it as such and not in a way that is considered gambling in the hopes of making a ton of money. Bitcoin and other cryptocurrencies are very speculative in nature, however. This has prompted much debate over the years as to whether these instruments are in fact halal. There is a large audience that would consider Bitcoin trading haram, a lot of it has to do with the fact that there is nothing tangible tied to it and it is not very well understood. Most people who invest in Bitcoin see how it has gone from mere pennies when it first was introduced to upwards of ten thousand dollars a coin and simply want to get in on this action. When investing in this manner it is considered more of a gamble since these individuals do not understand what they are trading and hence their actions would be considered haram. While the debate has gone back and forth, the answer in essence comes down to intent. Each person who decides to invest in Bitcoin and other cryptocurrencies should perform the necessary research and make sure that they are getting into the trades after due diligence in a business-like manner. When traders do that, their actions would be considered halal under Islamic law. Is Trading Options Haram? Or Is It Halal? In their simplest form, Options are contracts that give their purchasers a right, but not the obligation, to either purchase or sell a financial instrument at a predetermined price before the contract expires. There are two types of options traded in capital markets. These are - Call Options: These are contracts that give Option bearer the right (not obligation) to buy a security at a predetermined price before the Option expires. Put Options: These are contracts that give Option bearers the right (not obligation) to sell a security at a predetermined price before the Option expiration. With the advent of online trading a decline in trading costs, Options have now become a mainstream instrument for retail traders to trade. Plus, there are considerable advantages of trading Options versus buying and selling the actual securities, making Options immensely popular speculative instruments. Hence, it is only natural for one to wonder whether trading Options is considered haram or halal in Islam. Options trading is considered haram and not halal by the majority of Islamic scholars. Options trading is a zero-sum game, in which for one trader to make money, another has to lose it. Hence, under Sharia law, such transactions will be considered a form of gambling and thereby considered haram. That being said, every question can be addressed from multiple perspectives and this question is no different. There are several Islamic scholars that contend that if you understand what you are doing and have researched the options extensively then it may be considered halal. However, these individuals are currently in the minority. Is Margin Or Leverage Trading considered Halal? Or Is It Haram? Margin and Leverage trading have become widely popular in today’s trading and investment scene. Most brokers, irrespective of the financial instrument that you choose to trade, today offer some form of Margin and Leverage trading option. Before proceeding further in this section, for the benefit of the readers who are not familiar with these concepts, let us first quickly summarize what Margin and Leverage truly are - Margin is the term used to define the debt that you take from your brokerage firm or a financial entity to invest in or to trade financial instruments. Leverage is the ratio of between the money that you own in your trading account and the funds that are available to you for trading. You use Margin to create Leverage. In essence, Margin or Leverage trading simply refers to the act of borrowing money from your broker or another financial entity for the sole purpose of taking a bigger investment or trading position. There are obvious benefits to trading on margin and leverage. You can substantially boost the profit potential of your trades when trading with leverage. Hence, I am sure the question of whether Margin or Leverage trading is considered halal has at some point bugged many investors. Margin or Leverage trading is not considered halal and is rather deemed as haram, under Islamic law. This is due to the fact that Margin or Leverage trading involves borrowing and having an interest-bearing account, which is not permissible under Islamic law. That being said, you must note that under Islamic law, borrowing money in itself is not considered haram. However, Margin/Leverage trading usually involves some sort of commission, which in essence is parallel to paying interest for a loan. And, we have discussed earlier in the article, interest in Islam is prohibited, making Margin and Leverage trading haram in the eyes of Sharia law. Is Day Trading Or Intraday Trading Considered Haram? Or Is It Halal? Day trading, in simple terms, is the trading practice in which an investor opens and closes a trading position within the same business day. At its core, those involved in day trading target to not have any holdings in their trading portfolio once the market closes. The idea behind day trading is to not assume any overnight risk on the assets that one trades. Day trading, beyond doubt, is one of the more riskier forms of investment techniques. But, in the last several years, with the growth of online trading platforms, it has gained immense popularity. With this growing popularity, there are a ton of traders in the Islamic world who often wonder whether day trading is considered haram or halal under the Sharia law. Day trading is more or less considered haram, and not halal, in Islam. Most Islamic scholars see day trading, the act of buying and selling a security on the same business day, as a “get rich quick” scheme and not as a legitimate business practice. Thus, day trading is considered haram in Islam. That being said, the act of buying and selling a security immediately is not haram by itself. As discussed even during the other sections of this article, it is the intent of making a quick profit, which most experts believe is the motive behind day trading, which makes it haram. However, if you have your conscience clear and are in fact treating day trading as a business, there are no hard rules in Sharia law that would label your actions as haram, and your trading activities would be fully deemed as halal. Is CFD Trading Halal? Or Is It Haram? CFD stands for contract for difference and is a derivative product that lets you speculate numerous financial instruments such as forex, stocks, commodities, indices, etc., without having to own any underlying asset. In CFD trading, instead of buying and selling a security, you enter a contract that allows you to exchange the price difference for that security between the time of entering and exiting that contract. There are many advantages to trading CFDs. First and foremost, CFDs are leveraged instruments that allow you to bag massive gains against a relatively small investment capital. Additionally, with CFDs, short selling an asset becomes seamless and very easy. In light of these benefits, with many investors flocking towards it, CFD trading has become a hot financial market today. Therefore, it is natural for one to wonder if CFD trading is considered haram or halal under Sharia or Islamic law. CFD trading is not considered halal in Islam. Not owning the underlying asset and merely speculating on its future value is seen parallel to gambling, which is forbidden in Islam. Additionally, CFDs are leveraged, and trading them involves interest. Both these factors make CFD trading haram. With that said, innovation in trading products has led to the creation of investment products that allow you to trade these instruments without breaking any pious rules in Islam. Many Islamic brokers have today introduced swap-free CFDs that do not include any form of interest transactions. Therefore, with the introduction of these products, the only additional thing that you need to start trading CFDs is pure intent. Hence, if you treat CFD trading like a true business, and invest only in interest-free Islamic CFD products, your trading activity would be considered halal in Islam. Is Trading Indices Or Index Funds Halal? Or Is It Haram? In essence, Indices or Index Funds are the financial instruments that measure the price performance of a cluster of stocks from a stock exchange. For example, the Standard & Poor’s 500 Index, popularly known as S&P 500, is an index that measures the 500 largest publicly-traded companies in the United States. Trading Index Funds or Indices allow traders to diversify their asset exposure, making these instruments very popular in most trading circles. But, is trading Indices halal? Trading Indices or Index Funds is not considered halal in Islam. When trading an Index Fund, one assumes ownership in every company listed on that Index. Some of these companies engage in businesses that are forbidden in Islam, making Indices trading haram in Islam. That being said, there are a number of Sharia-compliant index funds that are available to trade and invest in today. Muslim investors willing to diversify risk, without breaking any pious rules in Islam or Sharia law, can totally invest in these Islamic funds, provided their intention is pure and they don’t treat such investments link gambling. Is Short Selling Haram? Or Is It Halal? In simple terms, short selling is the act of selling a stock or an asset that you do not own. At a high level, to execute a short sell trade there are three steps involved. First, you borrow the asset that you would like to short from your broker or a financial institution. Second, you sell the borrowed asset to a buyer or an interested party. Third, you repurchase the asset in the future (hopefully at price lower than what it was while borrowing) and return the borrowed asset to the issuer. Short selling provides traders with an instrument to profit from the decline in the price of an asset without actually owning it, and is thus very popular. But, is the practice of short selling truly permissible in Islam, or is it haram to short sell an asset? Short selling is unequivocally considered haram among the mainstream Islamic scholars. Selling an asset that one does not own and profiting from the losses incurred by others are both essential to short selling but considered haram in Islam. Thus, short selling cannot be considered halal. With that out of the way, it is important to note that many financial institutions and hedge funds today claim to offer Sharia-compliant short-selling instruments. In these instruments, financial institutions aim to provide individual traders the effect of short selling using innovative methods, such as - Wa’d based shorting and Salam contracts, that arguably don’t violate the Sharia law and pious Islamic principles in any way. However, such instruments are yet to gain mainstream acceptance in the Islamic world and are often frowned upon. Is Trading Gold Haram? Or Is It Halal? Gold was primarily used as a currency in historic times. But, with the growth of our civilizations, Gold today has a multitude of applications. In the modern financial markets, Gold has become a unique asset that attracts investors towards it as both - a safe haven asset and a speculative commodity. Plus, over the last several years, many investors have made a ton of money trading gold. But, is gold trading permissible under Islam? Or, will gold trading be considered haram? Under Sharia law trading gold is considered haram because it is a "Ribawi item" which means that it cannot be traded for future value. Hence, any speculative trades that one makes involving gold would be considered haram and not halal in Islam. Therefore, in a nutshell, whether or not trading Gold is haram, it essentially boils down to your intent. If you plan to use Gold as a vehicle of wealth protection in a market downturn, investing in Gold can be deemed as halal. However, if you are trading Gold merely as a speculative instrument in the hopes to profit from its future price, that would be prohibited and considered haram in Islam. Is Trading Futures Halal? Or Is It Haram? Future contracts are counted among the most popular financial instruments that are traded in the market today. In a nutshell, a futures contract is a standardized contract that binds two parties to trade an asset at a predetermined price and at a future date. Traders and investors leverage these contracts as hedging instruments and as speculative instruments alike. Therefore, it is natural for one to wonder whether Futures trading would be considered halal under Islam or would it be haram. Futures contracts don’t comply with Sharia requirements and are therefore considered haram, and not halal, in Islam. Futures trading is mostly speculative and does not involve a transfer of assets at trade execution. Both these acts are prohibited under Islam, making Futures trading haram. There are a few scholars who argue the legitimacy of futures contracts under Islam when traded with the right intent and treated as a business. However, these scholars are in extreme minority today, and the idea of future contracts being halal has not seen much wind. Therefore, if you are concerned about future contracts being haram in choosing to trade them, they are best left untouched. Conclusion In closing, we can look back at the discussion and see that there is not really a definitive answer on many of these topics. But the one thing that is the same in every area and should always be considered when broaching the subject of investing is the reason why you are doing it and what your intentions are. In order to stay the course and be sure that what you are doing is halal you want to always do your research, know what you are investing in and why, and make sure that is coming from a place of good intentions and not out of a greedy nature. Getting on the fast-moving, usually volatile stock because it looks like it will get you a lot of money would be considered haram. Researching and understanding your stocks and knowing you are making an investment in the long run, with a business-like approach, would be considered halal. These specific decisions and reasons - only you would know. So make sure you are truthful with yourself and do the right thing. 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