2 - islamic injunctions stock exchange

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ISLAMIC INJUNCTIONS ABOUT BUSINESS

Chapter on Stock Exchange

1) INTRODUCTION

a. When a person purchases shares of a Company and becomes a

shareholder, he cannot get back the amount invested from the

company. If he wants to disinvest, he will have to find another

investor and sell his shares to that investor. In this way the new

investor will become the shareholder and the previous one will get his

money disinvested.THIS HOE!ER ILL NOT A""ECT THE COM#AN$ AS THE

COM#AN$ ILL NOT #A$ AN$ AMOUNT TO AN$ONE%

b. The sale & purchase of shares is basically a deal between two parties but finding purchaser of shares of a particular company is not easy. To

facilitate this process, a market is established where sellers & buyers

may find each other. This market is known as Stock Exchange.c. Stock Exchange not only facilitates the sale & purchase of shares

rather it regulates it as well. The business of sale & purchase of shares

that is carried out without the involvement of Stock !change is

known as &o'er the co(nter tranact*on+.

d. Stock Exchange is a private body, established with the permission & patronage of the "overnment. The companies listed with the Stock

Exchange are called &L*te, Co-pan*e+%

e. Sale & purchase of Share o. L*te, Co-pan*e is possible in stock

e!change and o'er the co(nter tranact*on is also possible.f. Company may be listed after its creation. It may be before or after the

starting of actual business. In some cases even before the flotation of

shares.g% #isting before the flotation of shares is known as &#ro'**ona/

L*t*ng+%h. Companies that are not listed on Stock !change are termed as

Un/*te, Co-pan*e%

i. Sale & purchase of Share o. Un/*te, Co-pan*e is possible only

o'er the co(nter%

0) MEMBERSHI#



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a. $%# ''()S C*% +$ (SI%SS $% ST$C- C/*%"*s the business of Shares is very technical therefore everyone is not

permitted to deal in Stock !change. $nly 'embers are permitted to

do the business of Sale & 0urchase of Shares on Stock !change."eneral Shareholders must deal through a member.

b. C$''ISSI$% *"%TS1 'embers of Stock !change do business

for themselves, as well as, on behalf of their clients. While doing

business on behalf of a client, they charge certain 2age of

Commission3 hence they are also known as &Co--**on Agent+%

There are three types of placing order of purchase through a

Commission *gent3

i. 'arket $rder It4s the $rder to purchase on 'arket )ate.

ii. #imited $rder This type of $rder fi!es an upper limit of 0rice. If share are

available within the range of that 0rice only then *gent should

purchase, for his client, the re5uired number of shares.

iii. Stop $rder

It is the order that agent should sell the shares held by client if the price of share falls below a certain limit. (ut if3

6. it does not fall below that limit $)7. remains stable $)

8. it goes on increase, Then

agent should not sell the shares of his Client.

) DETERMINATION O" #RICES

a. #r*ce o. hare keep changing due to many reasons. The reasons

may include1



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i. Increase in value of *ssets of Companyii. +ecrease in value of *ssets of Company

iii. 0rospects 9 e!pectations of profitiv. *pprehensions 9 threats of lossv. Trends of Supply & +emand

vi. International & domestic political situationvii. Weather conditions

viii. Catastrophesi!. Speculations

Note2

*s e!ternal factors 3like those given on derail number. *'4 '% '*4 '** 5

*x above) also affect the prices of shares therefore, hare pr*ce * not

a tr(e repreentat*'e o. 'a/(e o. aet o. co-pan6%

7% B(// ' Bear

Trend of rising prices is termed as (ullish in Stock !change &

Trend of falling prices is termed as (earish in Stock !change

c% T6pe o. B(6er o. Share

There are two types of buyers of shares1

i. $ne type of buyers is those who purchase shares with theintention to keep it with them and receive the annual dividend

income.d. Second type of buyers is those who purchase shares with the intention

to sell the same when price rises. Such people treat the shares as a

commodity of trade. The profit that they make is termed as &Cap*ta/

8a*n+. These are known as :Spec(/ator+ as they speculate about the

price. Their speculation may turn true or may turn wrong.

9) #ROCEDURE O" SALE 5 #URCHASE O" SHARES

a. There are three possibilities or three methods for the sale & purchase

of shares1i. Spot Sales



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It is the simplest way. 0ay the cash and make purchase. (ut due

to administrative reasons it takes one week ;or few days< to take

possession of the shares.

ii. Sales on 'argin

It is the type of sale where a certain 2 age of total price is paid

by the client ;who is buyer< and the remaining amount is paid

by the commission agent 9 broker. This is regarded as credit by

the broker to his client. It may be interest free loan for a few

days ;e.g. 8 days< and beyond that the broker may charge

interest from the client.

(rokers are mainly interested in their commission of sale & purchase, and they want to keep the business running. =or this

purpose they get ready to give advances as well

iii. Short Sales

It is the sale of such shares which are not in the ownership of

the seller. The seller thinks that after the completion of

transaction I will buy the shares from a third party in the market

and give to the buyer.

b. Spot Sales versus =orward SalesThere is a difference between Spot Sales & =orward Sales

i. Spot SalesIn spot sales the sale is done & transfer of rights is also done on

spot.

(ut due to administrative reasons it takes one week ;or fewdays< to take possession of the shares. 'ore time is taken in

case of registered shares and less time in case of bearer shares.In many instances if the buyer feels he can make a profit, he

sells the shares to someone without getting possession of

shares.



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In this case if Company declares dividend during these days, it

will be given by the company to the person whose name

appears in its record. (ut it is an accepted norm that such a

person will transfer this dividend to the buyer.

ii. =orward Sales

In this case the sale is carried out but transfer of rights is

delayed till some future date. $n that date either actual shares

are handed over to the buyer or difference of prices is settled.Exa-p/e2

Sale of shares was done on 6st >anuary ? )s. 6@9A per share and

86st

'arch was fi!ed for delivery of shares. $n 86st

'arch the price of share is )s. 67 per share. %ow the seller who had

agreed to give shares ?)s. 6@9A per share, may give )s. 7 per

share to the buyer and settles the deal.

c. Spot Sales versus =orward Sales of -ind and other goods

i. Sale & purchase of crops and other goodsIn some cases the sale & purchase of crops and other goods are

also carried out in the same way as e!plained above for shares.

ii. =orward Sales vs =uture Sales in case of crops & goodsIt is basically the same. $nly difference is in usage of two terms

now a day is , that16. If delivery and receipt of actual goods is the obBective,

then it will be called =orward Sale.7. If delivery and receipt of actual goods is not the

intention, rather only settlement is the intention, then it

will be called =uture Sales.

iii. In some countries the &(usiness of =utures+ is done in Stock

!change and in some countries there are separate markets for

this purpose.



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d. SpeculationSpeculation is actually making estimation about future. Some people

speculate that the prices of shares of a certain company may rise in

future. $n the basis of their guess work, they may make a deal with a

party to sell 9 buy the same share on a future date on such a rate whichmay result for them in profit in the light of their guess work9

estimation 9 speculation.Their main obBective is not the Sale 9 0urchase3 rather it is to make

profit through settlement of differences.

i. =uture Sale & forward Sale1 *s e!plained above if delivery and

receipt of actual goods is the obBective, then it will be called

=orward Sale and f deliver and receipt of actual goods is not the

intention, rather only settlement is the intention, then it will be

called =uture Sales. =uture Sales is done to safeguard against

the possible loss.

ii. /edging1 =uture sale is also known as hedging. It is done to

safeguard against possible loss of future, therefore it is said

hedging.

:) SALE 5 #URCHASE O" O#TIONS

a. The right to sale or 0urchase some specific item at some specific price

is termed as :optionsThe person who gives the option may charge a fee for giving option.

The one who gives option is bound to fulfill his commitment but the

other part y is not bound for it.$ptions may be given in the business of currency, crops , shares or

any other item.!ample1* person purchased 6@@@9A dollars ? )s. 6@@9A per D. %ow he thinks

that if I sell it now, I may miss the opportunity of making profit, in



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case dollars price rises. *t the same time he is worried that he may

suffer a loss if the price of dollar falls in the market.

The person who gives :options, he may commit with this person that

for the ne!t three months ;or any other time period< I am ready to purchase your dollars ? )s. 6@@9A per D.

The person who gives :$ption will charge a fee on it. The other

party will get satisfaction. If the party could sell the dollars at profit at

any rate of its choice, the option giver have no obBection. It will Bust

receive the fee.If the dollar holding party could not sell dollars at profit, the option

giver is bound to purchase it from him.

b. In many countries, now :$ptions are treated commodity in its own

right which can be traded itself.

;) "INANCIAL MAR<ET

=inancial 'arket or Capital 'arket is a big market and Stock !change is a

part of that big market.

In addition to Shares ;being sold in Stock !change< =inancial 'arket deals

in financial papers issued by (anks & =inancial Institutions and also in the

financial papers issued by the "overnment itself, known as "ovt. Securities.

*lthough there is no separate physical e!istence of =inancial 'arket andthese activities are also carried out in Stock !change, but theoretically and

conceptually it has a separate e!istence..

=) h6 the 8o'ern-ent I(e Sec(r*t*e



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When the "ovt. needs money or otherwise feels it necessary it issues the

securities to borrow money from public. =or e!ample1

a. 0riEe (onds b. +efense Saving Certificatesc. -has +eposit Certificatesd. =oreign !change (earer Certificates ;=(C<e. tc

*ll the above are securities issued by "ovt. In general all these show that

"ovt. owes this much money to the bearer of this certificate. To facilitate the

public, the sale & purchase of these securities in secondary market is

allowed. 3 Secondary market means any market for sale & purchase of

such papers to anyone other than the original issuing authority<

>) A 7r*e. exp/anat*on o. ,*..erent 8o't% Sec(r*t*e%

a. 0riEe (onds %o interest is given to every individual who holds it. )ather after

certain intervals priEes of big amounts are given to some people who

are selected through a lottery b. +efense Saving Certificates1

Certain )ate of Interest is announced and every bearer of thiscertificate receives that from the "ovt.

To create attraction, certain rela!ations in ta!es are also given at

different t occasions.

c. -has +eposit Certificates

Certain )ate of Interest is announced and every bearer of this

certificate receives that from the "ovt

d. =oreign !change (earer Certificates ;=(C<(efore the delinking of 0ak )upee from S D ;that took place in

6FG@s< the rate of 0ak )upee was fi!ed in terms of S D by the "ovt.

=urther everyone was not permitted to hold the foreign currency.



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*s a result of this situation there was big difference between official

e!change rate and black market e!change rate.0eople wanted to retain foreign currency whereas "ovt. did not like it.

To solve this issue through incentives, the then "ovt. issued =(C.

The person who would give dollars to the "ovt. would get this =(C.

It showed that "ovt is indebted to this person for such an amount of

)upees. "ovt. would also pay him interest ? 672 per annum.This =(C holder can receive the foreign currency from govt. when

he would need it for foreign travel of trade.

2 - islamic injunctions stock exchange

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