Shariah Guidelines for Trading and Investment in Stocks
The Answer is ‘YES’
It is permissible for Muslims to invest in stock markets if the company’s Shares are in accordance with Shariah principles.
Trading in shares on the stock market is absolutely fine from an Islamic view point.
Unfortunately, that there is a common perception among Muslims that purchase and sale of shares in the capital market is akin to gambling and hence Islam prohibits it – This is not true!
It is worth mentioning that participation in the capital markets will not only improve the economic status of Muslims but it will also give them an opportunity to become a part of the development of the economy for the country.
Only those companies which are Shariah compliant can be invested in. Shariah compliance of companies listed on the stock market is dynamic and hence you need to keep a watch if a company is Shariah compliant at all times.
Which Companies listed on the Stock market are Shariah compliant?
Shariah Scholars have set few norms for Halal Investments in Shares of companies listed on the Stock Market.
The stocks of companies which are involved in prohibited activities like Conventional financial services, Insurance business activities, Stock broking business in general, sales of alcohol, pork, tobacco, gambling, casinos, betting, prohibited pictorial advertisements and entertainment based on music, movies and the likes are not allowed to be invested in by Muslims.
Stocks which derive revenue in excess of 95% of its total revenue from any activity other than the ones mentioned above are generally fine.
Such stocks are HALAL for investments with further application of accounting and financial ratios which will be elaborated below in accounting based checks.
Accounting & financial Ratio Screening:
Once the company is found to be not involved in any prohibited activity, it has to be examined on financial activities whether they are under the permissible threshold percentage as decided by Shariah scholars:
1. Debt / Market Value of Equity (36 Month average) < 33 %
2. Accounts Receivables / Market value of Equity (36 month average) < 49 %
3. (Cash + Interest Bearing Securities) / Market value of Equity (36 month average) < 33%
4. If a Company passes the above norms, a Muslim can buy shares of such Companies.