Is day trading Halal or Haram, and is there anything like an Islamic trading account on the financial markets? With one-quarter of the world being Muslim and expanding online trade, the question is increasingly being asked about where intraday trade fits in with Islamic law. This page will look at various perspectives and sources to address whether day trading is halal or haram. In particular, it will break down FX, stocks and binary options, and seek to provide advice on how to remain Halal.
Is Day Trading Halal?
Islamic values regulate many facets of the life of a muslim, from social to cultural. All of which are outlined in the Koran and the Sharia Law, which means ‘path to be followed.’ However, when it comes to day trading, black and white lines can easily turn grey.
One of the major concerns centers around the aspect of risk sharing. An item governed by 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, is haram or halal if you are investing in the case of forex, stocks, binary options, futures, commodities and currency?
Please bear in mind this website is not a religious authority concerned with Islamic day trading. If you want to be sure your trading practices are Halal, we recommend that you meet with a religious authority who can take your particular circumstance into consideration.
Is Buying Shares Halal?
It is widely accepted that stock buying is not haram. This is because, in a company, you own a percentage. You need to be sure, however, that the business in question does not operate in an un-Islamic way. For instance, businesses such as Guinness (alcohol) and Ladbrokes (gambling) will not be able to do this.
You can divide companies into three categories to shape an Islamic perspective:
- Shares from appropriate activities – Shipping, manufacturing, clothes, medical equipment, real estate, vehicles, furniture, supplies and so forth are all free of unsafe practices or transactions, such as cheating and borrowing on the riba basis (unjustified loans). Such businesses are also known as ‘clean’ businesses.
- Shares based on illegal activities – Any company dealing with gambling, alcohol, hotels, nightclubs, obscene materials, banks dependent on riba, commercial insurance firms, etc. are not permitted. Because of this the stock market is considered haram.
- Partially haram-based shares – While most work may be acceptable, some activities are haram. For example, transport companies hold interest-based bank accounts and are also funded by riba-based loans, or individuals by stocks. Such forms of companies are called ‘mixed’ enterprises.
So, what will you do if the business deals with products and services which are not in compliance with Islamic law?
You just don’t invest. The best decision if you want to stop any future dispute is to stop purchasing and selling stock shares at all. That said, there’s still some wriggle space left. You can still be able to trade in some cases, and stay halal.
Most scholars believe that if the business deals only with a fraction of non-Islamic goods and services, you should still invest. It’s suggested that you simply give away the percentage of income generated by the company’s haram segment. Therefore, if alcohol accounts for 10 percent of the company’s profits, you will donate 10 percent of your profits to a charity.
The other big problem area is centering around interest. You should not be dealing in interest, so you should be exchanging £25 for exactly £25. This may not always be possible though. When the stock price changes you eventually end up paying more or less for the debt/cash than the face value.
For example, if the business has only £2000 in cash and that makes up the bulk of the value, and the stocks sell at a total of £75,000, you pay more than the face value.
Luckily sticking with just halal shares is fairly simple. Some experts believe that you actually need to avoid businesses where huge amounts of debt/cash are attached to a substantial amount of their stock value. Alternatively, look for businesses where their larger business derives the interest.
You will actually find screeners of Islamic stocks which will classify halal stocks for you. These softwares are comparatively costly, however. Alternatively, most platforms allow you to get a company snapshot, highlighting their debt and market capitalization rates.
Common sense is essentially your greatest tool. Avoid highly leveraged businesses dealing with the procurement and selling of haram products and services. So, in short, whether stock trading is halal or haram depends entirely on the companies you pick, and how much income you keep.
Is Currency Trading Halal?
Forex trading is becoming increasingly available, with the opportunity for fast money attracting more traders every day. On the surface, as you are simply buying and selling money, this looks like one of the halal investment opportunities. Nonetheless, dig a little deeper and you may wonder that forex trading is really haram?
If you were to buy £4,000 for $2,5000 and sell it, as the pound appreciates against the dollar, 6 months later, then this is a halal purchase. Yet in fact many problems remain.
You need to spend huge amounts of money – thousands, if not hundreds of thousands of pounds – to make significant intraday gains from tiny price changes. So, Forex brokers give you leverage to mitigate this issue. Basically allowing you to invest £50 or £75 for every £1 that you put up. You can take far bigger positions now, and increase your income.
This is, however, a loan. Under Islam, borrowing from others for investment purposes is acceptable for making a profit, and then returning the interest-free loan to the borrower.
Yet fx brokers lend you the money for the purpose of taking a commission. They will effectively yield a return on any exchange. Many scholars look at this as a source of interest, rendering forex trading haram.
Islamic forex brokers have fortunately responded by offering an alternative to the day traders. Now you can get forex accounts that do not charge regular interest payments. Instead they demand higher commissions on spot forex trades to stay competitive.
Although some say this is merely a disguised portion of interest, many scholars are happy with this new form of trade facilitation. Any ‘standard’ spot forex trading offered by brokers with no overnight fees may well clear the obstacle to riba.
Hand To Hand Exchange
The next issue relates to the exchange itself, with the interest item out the way. Trading is allowed as long as it is a hand-to-hand exchange. This indicates that the prophet Mohammed clearly had goods traded between two parties in mind, as a natural part of trade.
Most transactions may have been made face-to-face in the past but what constitutes ‘hand-to-hand’ with the advent of e-commerce?
Some claim the agreement is made between the broker and the trader, which would count as two distinct parties, and thus is seen as halal.
Scholars have gone on to claim that when the contract is completed, the actual transaction will take place in the same ‘sitting.’ So, trades have to be entered and exited almost immediately, as they normally are with forex traders. That may mean that non-market trades like stop-and-limit orders are haram.
Another part of the answer to ‘is forex trading lawful in Islam?’ centers around land. You’re just speculating whether the currency’s value will rise or fall, so is this halal?
This is certainly hard to answer and something you may want to seek detailed religious advice on.
Most agree with many factors that address the question concerning forex. Islam acknowledges the need of men, including their financial condition, to change their lives. When faced with choices, we all have to understand consequences and use intelligence to react to those situations.
And while we know that gambling is strictly haram, you can find halal forex brokers who have made every effort to keep all practice strictly within the boundaries of Islamic legislation.
Is Trading Binary Options Halal?
Unlike other methods of trading, binary options offer more transparent trading than other instruments, like stocks and forex. The option either pays out a set sum of cash if the option expires in the money, or when the option expires out of the money, it will pay out nothing.
If the trader has no knowledge of what and how to trade, then it will be a form of gambling to trade binaries, and thus not halal.
In fact, as each contract must have a winner and loser, this might not be halal. And not every party can benefit from the exchange or derive value from it. Therefore, it should be remembered that many consider binary choices to be inherently haram.
That said, there’s also a growing school of thought that only the individual trader will know whether binary trading is halal or not. If you grasp the trade’s nuances then you may not be gambling. Given multiple brokers are offering ‘Islamic’ accounts, when you exchange binaries you can only then really know whether you are working within Islamic parameters.
Islamic Trading Accounts
It’s obvious that halal online trading depends partly on your actions and partly on the broker you pick. Whatever your online Islamic investment is, be it stocks, fx or options, you need to meet the following conditions for a broker that says it sells accounts based on Islamic principles:
- Immediate execution of trades – Cutting out the delay will help please the rule of prompt hand-to-hand trades between 2 parties.
- Immediate settlement of transaction costs – Be cautious of accounts where open transactions are immediately rolled over to the next trading day, as interest charges may be incurred for rollover.
- Zero interest rates on trades – There must be no risk in avoiding violating laws around riba. Any interest is considered null and not halal.
If day trading is halal or haram – there will always be a split in opinion. It should also be noted that this page does not seek to give religious guidance to the readers despite in-depth research into various sources. It looks to gather various perspectives and present them in a way that is easy to absorb.
While there certainly remains a large number of people who believe Islamic day trading is halal, perhaps the best move you can take is to carefully pick your broker and review your business decisions with halal criteria in mind.