The $tock Market

Halal or HaramIn theory & practice

Sourah Al-Baqara, ayah 27:Those who break the covenant of

Allah after ratifying it, and sever that which Allah ordered to be joined,and (who) make mischief in the earth:

Those are they who are the losers.

The concept of a market• A market is a place where

buyers & sellers exchange goods/service in exchange for money

• Markets existed at the time of the prophet

• There is no issue on the concept of markets

The concept of stock marketThis is a specialized market where the

ownership of companies is bought & sold

Ownership in sold in the form of shares, which have prices attached

The share price determines the over all price of the company

Such a specialized market did not exist at the time of the prophet, but there is nothing un-Islamic about the idea

Qiyas: Like a specialized market where animals are bought & sold

The basic concept – how is profit/loss distributed

• Dividend

• Increase in stock price –reflects profit

• Decrease in stock price – reflects loss

• The concept of profit & loss is reflected in the change in stock price, in line with Islamic principles

Dividend ExampleStock price: Rps 100

# of outstanding shares: 1,000

Profit earned: Rps 1,000

100% distributed to share holders (Dividend)

Rps 1000/1000 shares= Rps 1 per share

Islamically acceptable

Profit Example – Increase in stock price

Stock price: Rps 100# of outstanding shares: 1,000Profit earned: Rps 1,000No dividend: 0% distributed to

share holdersRps 1000/1000 shares= Rps 1 per

share increaseNew stock price = Rps 100

+ 1 = 101Islamically acceptable

Loss Example – Decrease in stock price

Stock price: Rps 100# of outstanding shares: 1,000Loss suffered: Rps 1,000No dividend: 0% distributed to

share holdersRps 1000/1000 shares= Rps 1 per

share decreaseNew stock price = Rps 100 -

1 = 99Islamically acceptable

The stock market – in theory

• Thus, in principle the idea of a stock market is Islamically acceptable

• Ulema issue FATWA on the basis of information provided; thus, Ulema say that stock market trading is halal

• Ulema put a few valid Islamic restrictions

Stock Market Restrictions

• Avoid companies which have unislamic products, such a (interest) banks, alcohol, pig products

• Avoid companies that produce goods to harm Muslims, Lockheed, General Dynamics

• Avoid companies that aid the enemies of Islam, Coke, McDonalds

• Prefer Muslim companies; avoid non-muslim companies ?

Stock Market Ulema Restrictions

• Short selling – Haram• Futures trading – Gambling• Futures short selling – Haram• Avoid day trading – keep min 4 days• Margin trading involves interest – Haram• Speculation trading is the same as gambling

The stock market in practice

The stock market operates very differently in practice!

There are elements of: • Gharar (uncertainty) • Maisir (gambling), betting, speculation• Riba (interest)• Qimar(one parties loss is another’s gain)• Kazab (lying, and misleading)

Example of Riba• Listing of banks & interest

based financial institution

• Solution: Don’t deal with them!

Changes in stock price – more than profit/loss

• Expectations & rumors• Future expectations more

important than current realities• Big investors have great influence

& control• News• P/E value plays a major role –

generally over inflated valuation• A company may earn a profit, and

the price may go down!• Expectation & speculation

KSE-Controlled by big fish ?

The “big fish” (BF) toy with KSE• AKD• Jahangir Sadiqque• Arif Habib

The stock market gameMonth KSE Siemens ActivityJan 2006 8,000 1,000 BF begin gameFeb 2006 9,000 1,100 BuyingMarch 2006 10,000 1,200 BuyingApril 2006 11,000 1,400 BuyingMay 2006 12,000 1,500 BuyingJune 2006 13,000 1,700 SellingJuly 2006 14,000 1,800 SellingAugust 2006 16,000 2,000 SellingNo more momentum, and the market begin to

decline!Now it’s a BEAR market!Price increase is not because of company

profitability!

Intention of buying• Not buying because of the profitability of companies• Only because the market is going up & up-

speculation (bull)• The analysts of the Big Fish cautiously create a

fervor, & mislead the Small Fish – (Engineering QIMAR!!!)

• Gambler’s instinct at work!• The Big Fish make their money, at the expense of

the Smaller Fish – Qimar• The Big Fish safely exit the market, at the expense

of the Small Fish (bursting of bubble – market crash !)

• Those trading on margin are wiped out !• Qimar,Maisir, Kazab, Riba & Gharar ALL present in

practice!

Big Fish expert planning & control

Month KSESiemens ActivityAugust 2006 16,000 2,000 Selling futures optionsSept 2006 14,000 1,800 Selling futures optionsOct 2006 12,000 1,600 Selling future optionsNov 2006 10,000 1,400 Selling future optionsDec 2006 8,000 1,200 Selling future optionsJan 2007 7,500 1,100 BuyingFeb 2007 7,000 1,000 BuyingMarch 2007 6,500 900Buying

The Big fish eat all the small fish,& are preparing for round 2!

Now it’s a BULL market!

The stock market game PROOF -yearly

The Stock market – daily game

Difference between theory & practice

• In theory Hindus eat vegetables only.• But in practice they eat meat.• Should we eat the food of Hindus

(prepare & slaughtered by them)?• In theory the people of country X (who

are non-Muslims) do not have a prejudice against Muslims.

• In practice the people of country X strive to persecute Muslims.

• Should we migrate to country X ?

Now Ask the Ulema• There is an 80% chance that the market

will go up tomorrow; can I buy any share such as Bosicor or Maple Cement ?

• There is a rumor that Jahangir Sadiq will buy 1 million shares of Attock Refinery, shouldn’t I buy this stock immediately?

• Because the market goes up 100 points every day, there is a 70% chance that it will go up tommorrow as well, but my gut feeling is that it will not (my gut feeling correct 80% of the time); should I buy shares today (before market closes) ?

• Profit are announced every 3 months, but the price changes every minute ?

Important noteUlema give FATWA on the data

given to them!

Assignment:Explain the practice of the stock

market to any Alim, & get his FATWA!

Is the stock market Halal or Haram ?

The Islamicly acceptable stock market

Should be free of all haram things, such as:• Riba• Gharar• Kazab• Maisar• QimarThe resultant stock market would be very

different;Those people who are addicted to & enjoy the

sinful stock market, will find it to be unadventurous & manipulative!

The Islamicly acceptable stock market

The resultant stock market would be very different from what we see today, & sinful people would not find it attractive or enjoyable, because it would be:

• Stable; free of erratic volatility• Price change would be a function of profit, & would

normally change on quarterly basis, as apposed to erratic volatility by the second

• It would be based on actual valuation rather that speculation

• Real valuation would ensure from stock market crashes• Profitability and loss would be gradual• Deviant & misleading officials & companies will be

punished• Ulema encourage dividend model in conventional model• Interest group manipulation & maneuvering NOT

possible

Ordered to give good newsSourah Al-Baqarah, ayah 25:

And convey good news to those who believe and do good deeds,

that they shall have gardens in which rivers flow; whenever they shall be given a portion of the fruit

thereof, they shall say:

This is what was given to us before; and they shall be given the like of it, and they shall have pure mates in them,

and in them, they shall abide.