Investing in the stock market as a Muslim

Investing in the stock market as a Muslim

How to invest in the stock market as a Muslim? Invest in the stock market fascinates more and more people attracted by the possibility of generating additional income in the long term. However, many Muslims are reluctant to take the plunge, fearing that this practice is incompatible with their faith. Islam very strictly regulates financial transactions, prohibiting many common mechanisms of modern markets.

However, on closer inspection, investing in the stock market is not fundamentally incompatible with the principles of Islamic finance.

By opting for adequate investments, avoiding certain pitfalls, and respecting a few essential rules, Muslims can invest in the stock market while remaining faithful to their religious ethics.

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The basics of investing in the stock market 📈

Investing in the stock market is buy assets such as stocks, bonds or other financial assets in the objective of generating long-term profits.

By owning shares in a company, you become a shareholder and are entitled to a portion of the profits in the form of dividends. You are also betting on the increase in the resale value of the share. It's as simple as that.

The major stock markets as the NASDAQ or the CAC 40 allow you to invest in hundreds of listed companies. It is possible to buy shares directly or through mutual funds.

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The rules of Islamic finance 🕋

Investing in the stock market as a Muslim means respecting the Sharia. In fact, Islamic finance is based on the principles of Sharia. The Muslim investor must imperatively respect these rules in the choice of his investments. Some common practices in conventional finance are prohibited:

✔️ The riba ❌

The riba is one of the fundamental prohibitions in Islamic finance. According to the sacred texts of the Koran, any form of interest or usury is strictly prohibited for Muslims.

The term riba designates any income, gain or rent obtained from a loan of money, in return for the time elapsed. Concretely, this includes interest earned on a savings account, interest paid on a bank loan, but also compound interest which increases over time.

Conventional bonds, which pay fixed interest coupons, are thus prohibited for a practicing Muslim. Only Sharia-compliant Islamic bonds (sukuk) are permitted, as they do not pay illicit interest.

Likewise, it is prohibited to invest in conventional financial institutions which make loans with interest. Banks, insurance companies and credit bureaus are to be avoided.

✔️ The gharar ❌

If you want to invest in the stock market, you will need to avoid gharar. The gharar designates excessive uncertainty and randomness in financial transactions. In Islamic finance, gharar is prohibited because it introduces injustice and speculation.

More specifically, gharar covers different notions:

  • The asymmetry of information between parties to a contract
  • The ambiguity of the terms of the contract
  • Uncertainty about the very existence of the subject of the contract
  • Risky and unreasonable speculation

To comply with the ban on gharar, Islamic financial contracts must be perfectly transparent, understandable by all parties, and relate to real and identified assets.

Regarding stock market investment, the concept of gharar therefore encourages invest responsibly avoiding excessive risk-taking. It also encourages people to prefer the real economy to financial speculation.

✔️ Illegal investments ❌

You will also need to think about tangible assets if you want to invest in the stock market. Islamic finance formally prohibits investments in certain sectors of activity deemed illegal and unethical.

The scriptural sources clearly prohibit areas related to alcohol, gambling, pornography, or speculative finance.

Concretely, it is prohibited for a muslim to invest in companies related to the production or distribution of alcoholic beverages. Manufacturers of beer, wine and spirits are to be avoided. Casinos and other gambling and betting establishments should also be avoided.

The same is true for adult entertainment industries, such as the production of pornographic films, are considered haram. The same goes for the arms industry, especially controversial weapons.

✔️ Speculation ❌

The speculation unrestrained is prohibited in Islamic finance because it is considered a prohibited game of chance (maysir). Indeed, carrying out financial transactions solely with the aim of profiting from very short-term price fluctuations is seen as a risky and immoral gamble.

This type of pure speculation is assimilated to gambling, and does not participate in the real economy. Religious texts condemn these practices of exclusive and disproportionate pursuit of profit.

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They advocate a sound and ethical investment, where the investor actually shares the risks and participates in the creation of value. Thus, to be legal, a stock market investment must be a responsible investment over the long term, and not a succession of risky bets unrelated to the company's activity.

Which preferred assets? ✅

Not all businesses and sectors are permitted for the Muslim investor. Investing in the stock market is therefore regulated. To invest in the stock market while respecting the principles of Islamic finance, certain assets are to be favored by Muslims.

First of all, opt for stocks having low debt and generating a minority share of their income via interest. Also filter prohibited sectors (alcohol, tobacco, etc.). You can also turn to sukuks, the Islamic equivalent of bonds, backed by tangible assets and real cash flows rather than pure financial interest.

Finally, for greater ease, turn to exchange traded funds replicating Islamic stock indices. Filtering of non-Sharia-compliant values ​​is already carried out. With these guidelines, you will invest in the stock market with a light mind and in full agreement with your religious principles.

Investing in real estate to earn rent is permitted. Be careful though loans with interest. Real estate investment is therefore a good way to invest in the stock market as a Muslim.

Islamic Stock Indices 📊

These indices based on ethical and moral filters are meeting growing interest from investors, Muslims but also non-Muslims, seduced by this more virtuous finance. Concretely, the filtering methodology for composing these indices varies but is generally based on sectoral exclusion and financial ratios.

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Sectoral exclusion makes it possible to immediately remove companies involved in illicit activities (gambling, alcohol, tobacco, etc.) or deemed harmful to society (armaments). Financial ratios measure the level of debt and the share of income derived from financial interest. Companies with too much debt or with income mainly from interest are also excluded.

Thanks to this double filtering, Islamic indices replicate the performance of global markets by mimicking their composition, but without elements incompatible with Islamic investment ethics.

Choose a halal online broker 💻

To trade stocks in accordance with the principles of Islamic finance, it is recommended for a Muslim to go through a certified online broker “halal“. Such a status certifies that the broker offers accounts and services that comply with the precepts of Sharia law: no transactions involving ribâ (interest), exclusion of haram (non-compliant) businesses, etc.

For example, the online broker Dubai First offers certified Islamic investment accounts with filtering of financial securities according to ethical extra-financial criteria. Its certification also implies an annual donation policy that complies with zakat and other verifications.

The advantage of such a specialized broker is to simplify the investment stock market of a Muslim individual thanks to a pre-selection of securities compatible with his religious morality. Significant comfort to calmly concentrate on the management of your stock positions!

To invest in the stock market directly, you will need to go through an online brokerage platform. Some are more respectful of Islamic principles:

  • Wahed Invest : leading online broker offering pre-built halal ETF portfolios.
  • Yields : halal investment in stocks and real estate without riba.
  • IFDC : platform that certifies the Sharia compliance of the products offered.

Make sure you choose a broker that is reliable, transparent, and only offers legal investments.

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Cryptocurrencies

The relationship between cryptocurrency and Islamic finance can also be viewed from the perspective of exchanges. Cryptocurrency functions as a medium of exchange across the world. This means that it can operate in legally diverse and unpredictable environments, which often makes it more accessible than traditional financial options.

Although vulnerable to market changes, crypto coins such as Bitcoin and Ethereum are considered a legitimate medium of exchange. They are available for use in transactions and commerce.

purse as a muslim 1

The development of Sharia-compliant cryptocurrency guidelines provides opportunities for Muslims to make ethical investments. From a financial point of view, Islamic charities could benefit enormously from Zakat and other donations through crypto investing and trading.

Many banks and financial institutions around the world recognize crypto as a financially viable medium of exchange. This makes it easier for investors to continue trading, buying, and selling cryptocurrency.

As to whether contracts relating to crypto are sharia compliant, since contractual relationships in crypto are based on smart contracts using blockchain technology, this means that the process can be made more and more more secure and automated. This not only reduces administrative complexities, confusion and errors.

Participatory and share-based cryptocurrencies have a project more in line with Islamic ethics.

Zakat and investment 💰

Zakat is obligatory almsgiving in Islam. It usually amounts to 2.5% of income and savings. Most scholars agree that zakat also applies to investments.

This rule of purification also applies to profits generated by financial investments. Some ulema even recommend paying zakat on each significant capital gain realized following the sale of a share, without waiting for the annual deadline.

Paying this religious tax allows you to sanctify your financial capital, to purge it of its sometimes selfish and speculative character. Zakat embodies an act of sharing and solidarity towards the weakest.

Fatwas on investing in the stock market 🔎

Investing in financial markets and the stock market raises questions for a Muslim wishing to align his investments with the principles of Islamic finance. Also, many ulemas have spoken out on the subject through various fatwas.

If some scholars are very reserved towards the stock market and its speculative deviations potential, the majority see it as a legal economic activity under certain conditions. Thus, the European Council of Fatwa and Research considers investment in stocks to be generally halal.

Among the main recommendations issued in these fatwas, we find the need to choose an ethical company, the filtering of illicit sectors (alcohol, weapons, etc.), the exclusion of mechanisms based on usurious interest, or even the obligation to levy zakat on dividends and profits.

If these precautions are respected, investment in the stock market can therefore be validated and encouraged. Some even see it as a way to boost the real economy and introduce more moralization thanks to the influence of Muslim investors. Participation in general meetings and shareholder votes is also recommended.

En conclusion

In conclusion, it is quite possible for a Muslim investing in the stock market while respecting the principles and ethics of Islam. Although some aspects of modern finance are incompatible with Sharia, many options are available to the informed investor.

By opting for Sharia-compliant screened stocks and funds, avoiding riba in all its forms, being wary of speculation, and scrupulously paying their zakat, any Muslim can generate halal income on the stock market.

Admittedly, this requires more research than a classic investment to select suitable and legal assets. But the effort is worth it to have peace of mind and not contravene one's religious beliefs.

With an appropriate strategy, it is therefore entirely permitted and even recommended to grow your savings through the stock market. Far from being prohibited gambling, it can be a source of ethical income and a fulfilling project. Do not hesitate to get started, and May Allah guide you in your investments !

In this post, Finance de Demain as always makes the rounds to give you his point of view on how to invest in the stock market as a muslim. But before you leave, here's how invest in real estate step by step.

FAQ

Q: Is investing in the stock market permitted in Islam?

R: Yes, investment is generally authorized as long as it respects the principles of Islamic finance: no interest or speculation, investment in the real economy.

Q: What criteria for selecting halal stocks?

R: It is necessary to analyze the company's activity and ensure that it does not generate the majority of its turnover in the sector of alcohol, tobacco, weapons, pornography, etc.

Q: Are dividends paid by corporations permitted?

R: Yes, dividends are permitted as long as they result from ethical and non-speculative economic activity.

Q: Can you invest in any stock index?

R: Some very broad indices do not make it possible to filter out companies that do not comply with Sharia law. It is better to target Islamic indices or compliant funds.

Q: Are there funds invested in stocks compatible with Islamic finance?

R: Yes, more and more funds are offering investment filters that comply with Sharia law. They represent a practical solution.

Q: Do you have to pay Zakat on your investments in stocks?

R: Yes, if you have held shares for at least a year, their value is subject to Zakat according to the same calculation as bank balances.

Don't hesitate if you have any other questions about halal stock market investing!

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