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Halal Day Trading and Islamic Accounts
Is day trading Halal or Haram, and is there such as thing as an Islamic trading account on the financial markets? With one-quarter of the world being Muslim and the development of online trading, the question of where intraday trading fits in with Islamic law is increasingly being asked. This page will consider numerous viewpoints and sources in order to answer whether day trading is halal or haram. It will break down forex, stocks and binary options in particular, and try to offer guidance on how to stay Halal.
Islamic Trading Accounts
Is Day Trading Halal?
Islamic principles govern many aspects of a Muslim’s life, from social to economic matters. All of which are outlined in the Koran and by Sharia Law, which quite literally means ‘pathway to be followed.’ When it comes to day trading though, black and white lines can quickly become grey.
One of the biggest concerns centres around the risk sharing element. An element which is regulated through principles such as Bai’ al ‘inah (sale and buy-back agreement), Bai salam, Mudarabah (profit sharing), Bai’ muajjal (credit sale), Bai’ bithaman ajil (deferred payment sale), Murabahah and Musawamah.
So, in the case of forex, stocks, binary options, futures, commodities, and currency, is investing haram or halal?
Please note that this site is not a religious authority on the subject of Islamic day trading. If you want to be certain that your trading activities are Halal, we recommend that you consult with a religious authority that can consider your individual situation.
Is Buying Shares Halal?
It is generally accepted that buying stocks is not haram. This is because you are simply owning a percentage in a business. However, you do need to be sure the company in question is not dealing in a un-Islamic manner. Companies like Guinness (alcohol) and Ladbrokes (gambling), for example, would not be allowed.
You can break down companies form an Islamic perspective into three categories:
- Shares from permissible practices – Shipping, manufacturing, clothing, medical equipment, real estate, tools, furniture, supplies and so on are all free from haram practices or transactions, such as cheating and borrowing on the basis of riba (unjustified lending). These companies are also known as ‘clean’ companies.
- Shares based on prohibited practices – Any company that deals in tourism, alcohol, hotels, nightclubs, pornographic materials, riba-based banks, commercial insurance companies, etc, is not permissible. In these circumstances the stock market is haram.
- Shares based on partly haram practices – Whilst the majority of the work may be permissible, some practices are haram. Transportation companies, for example, hold interest based-bank accounts and are often financed by riba-based loans, or individuals through stocks. These types of companies are known as ‘mixed’ companies.
So, what do you do if the company deals in goods and services that do not agree with Islamic law?
You do not invest. If you want to avoid any potential conflict the easiest decision is to avoid buying and selling shares in the stock at all. Having said that, there remains some wriggle room. In some cases, you may still be able to trade and remain halal.
Most Scholars are in agreement that if the company only deals in a fraction of un-Islamic goods and services then you may still invest. It is suggested that you simply give away the percentage of the profits that are created by the haram section of the business. So, if 10% of the company’s profits stem from alcohol, you’d donate 10% of your profits to a charity.
The other major area of concern centres around interest. You shouldn’t be trading in interest, so ideally you’d exchange £25 for precisely £25. However, that may not always be feasible. As the stock price varies you inevitably end up paying more or less than face value for the debt/cash.
For example, if the company has just £2000 in cash and that makes up the majority of its value, and the stocks trade at £75,000 in total, you’re paying more than the face value.
Fortunately, it is relatively straightforward to stick with just halal shares. Most scholars agree you simply need to avoid companies where a considerable amount of their stock value is tied to large piles of debt/cash. Instead, opt for companies where the value is derived from their broader business.
You can actually find Islamic stock screeners that will identify halal stocks for you. However, such software is relatively expensive. Alternatively, most platforms allow you go get a screenshot of the company, highlighting their debt levels and market capitalisation.
For the most part, common sense is your greatest weapon. Avoid heavily leveraged companies that are concerned with the buying and selling of haram goods and services. So, in summary, whether stock trading is halal or haram, entirely depends on the companies you opt for and how much profit you retain.
Is Currency Trading Halal?
Forex trading is increasingly accessible and the potential for quick money draws more traders in every day. On the surface, this looks like one of the halal investment opportunities as you’re simply buying and selling money. However, dig a little deeper and you might wonder is forex trading actually haram?
If you were to buy £4,000 for $2,5000 and sell it six months later when the pound appreciates against the dollar, then this is a halal transaction. But in reality there remain several issues.
To make substantial intraday profits from tiny price movements you need to invest large sums of money, thousands, if not hundreds of thousands of pounds. So, to alleviate this problem forex brokers offer you leverage. In effect allowing you to invest £50 or £75 for every £1 you put up. You can now take much larger positions and increase your profit.
However, this is in effect a loan. In Islam, it is permissible to borrow from someone for the purposes of investing to make a profit and then return that loan interest-free to the creditor.
However, with forex brokers, they are lending you the money for the sole purpose of taking a commission. Effectively they will make a return on every trade. Many scholars consider this a form of interest, making trading forex haram.
Fortunately, Islamic forex brokers have responded by providing day traders with an alternative. You can now get forex accounts which won’t charge you standard interest payments. To remain profitable they instead charge increased commissions in spot forex trades.
Whilst some suggest this is simply a disguised interest component, many scholars are content with this new method of facilitating trades. Any ‘regular’ spot forex trading offered by brokers with no overnight charges could well clear the riba obstacle.
Hand To Hand Exchange
With the interest element out the way, the next issue relates to the exchange itself. Trading is permissible ‘so long as it (exchanges) is hand to hand’. This shows the prophet Mohammed obviously had in mind commodities would be exchanged between two parties, as a natural part of commerce.
In the past most deals would have been done face to face, but with the evolution of e-commerce what constitutes ‘hand to hand’?
Many argue the deal is made between the broker and trader, which would qualify under the definition of two different parties, and therefore halal.
Scholars have gone further to say the actual exchange must take place in the same ‘sitting’, when the contract is made. So, trades must be entered and exited almost immediately, which with forex traders they usually are. This could perhaps mean though that non-market trades such as stop and limit orders are in fact haram.
Another part of the answer to ‘is forex trading legal in Islam?’ centres around ownership. You are merely speculating whether the value of the currency will increase or decrease, so is this halal?
This is difficult to answer definitively and it may be something you want to seek specific religious advice on.
Many are in agreement with several factors surrounding forex that may answer the question. Islam recognises the need for humans to want to improve their lives, including their financial situation. We all must consider implications when confronted with choices and use intelligence to respond in such situations.
So, whilst we know gambling is strictly haram, you can find halal forex brokers who have made every effort to keep any activities strictly within the confines of Islamic law.
Is Trading Binary Options Halal?
Unlike other forms of trading, binary options offer more straightforward trades then a lot of other instruments, such as stocks and forex. The option will either pay out a fixed amount of compensation if the option expires in the money, or it will pay out nothing if the option expires out of the money.
If the trader has little knowledge of what and how to trade, then to trade binaries would be a form of gambling, and not halal.
On top of that, because each contract must have a winner and loser, this is arguably not halal. For not every party can profit or extract value from the trade. So, it’s worth noting that many consider binary options fundamentally haram.
Having said that, there is also a growing school of thought that only the individual trader can know whether trading binaries is halal or not. If you understand the complexities of the trade then perhaps you are not gambling. So, despite numerous brokers offering ‘Islamic’ accounts, only you can truly know whether you are acting within Islamic parameters when you trade binaries.
Islamic Trading Accounts
It is clear that halal online trading will depend partly on your actions and partly on the broker you opt for. Whatever your online Islamic investment, be it stocks, forex, or options, for a broker to claim they offer accounts based on Islamic principles, they need to meet the following criteria:
- Immediate execution of trades – Cutting out the delay helps satisfy the rule of prompt hand to hand exchanges between two parties.
- Immediate settlement of transaction costs – Be wary of accounts where open trades are automatically rolled over to the next trading day, as they may incur interest charges for the rollover.
- Zero interest rates on trades – To avoid breaking rules around riba, there must be no interest. Any interest will deem the contract invalid and not halal.
See the list of Islamic trading accounts.
There will always be a divide in opinion as to whether day trading is halal or haram. It must also be noted that despite in-depth research into numerous sources, this page is not trying to offer readers religious advice. Instead, it looks to collate viewpoints and present them in an easy-to-digest format.
Whilst there certainly remains a substantial number of people who conclude Islamic day trading is halal, perhaps the best steps you can take are to choose your broker carefully and evaluate your trade decisions with the parameters of halal in mind.