Investing & Trading in Islam

Hey readers =0) I tried posting the following message on IslamOnline.net, but kept getting an error message. So I figure that I might as well post it SOMEWHERE. Guess it would be okay for me to post it in my own blog, lol. Here goes:

As-salamu 'alaykum. I came across some questions pertaining to the trading of stocks and options on this site, and I'd like to have something clarified.

Firstly, as a matter of disclosure, I HAVE traded and invested stocks and options in the U.S. corporations for about 3-4 years.

What I've come to realize is that there is a BIG difference between the words TRADING and INVESTING. The word TRADING (from my personal experience) suggests SPECULATIVE gains from either stocks or options in the financial markets - i.e., involving a great degree of guess work, with no real intension of actually OWNING a fractional interest in the underlying company. In other words, in my experience, this has felt more like a "halal-ified" form of gambling because the TRADER is making his decisions by looking at charts, volume, etc... (in the way an astrologer would make astro-forecasts using charts).

Also, most of the time trading/speculating leads to large financial losses anyway. So it’s not a very profitable business model to begin with, and most traders lose their entire portfolio, and get deeply into margin debt with their broker in a year or two, because it’s very difficult to be able to make 365 right/profitable decision in a year, opposed to having to make just 1. And when a trader DOES make a profitable trade, that evil Shaytaan will USUALLY get the best of him by playing with his/her emotions, and enticing them towards greed to take ANOTHER huge risk in another haram trade.

Therefore, when answering questions regarding such financial instruments you folks must take this (risk of falling into gambling) into consideration, and not just isolate haram industries/companies - i.e., those who’s products include interest or alcohol (banks, beer companies…). Of course, someone who trades (gambles/speculates) in the shares, options, or futures of haram companies/industries to begin with is doing everything wrong (Islamicly speaking), I’d say.

Second, options and futures are NOT ALL haram – based on my personal experience. I say this because options are non-interest bearing contracts that can be used as a hedging/insurance instrument for shares/stock a person already owns in a company.

Example:

You’ve owed 1,000 shares of Google (NASDAQ: GOOG) @ $100 USD since shortly after it’s IPO with the interest of owning them long term because you believed in the business model after analyzing the prospectus/industry, etc… (and not just gambling on “flipping” it for a profit), but you wanted some insurance on the downside because it was/is a young company with lots of competition from mature companies like Microsoft (NASDAQ: MSFT). 1,000 shares would have cost you $100,000 USD back in August 2004), and so you bought 10 put option contracts (LEAPS) which expire 2 years from that point as insurance. This would, in my humble opinion, be an acceptable investment in Islam. By the way, GOOG (as with all other American companies) DOES derive an insignificantly small amount of it’s profits on it’s bank balance/cash from interest, and from unexpected gains in exchange rates. So perhaps a Muslim could subtract that amount (in %) from his/her gains, and donate it in the form of Zakat???

And regarding futures, well, a hard working farmer (or a rich oil billionaire sheikh in some Arab state) might want some security of selling his crops/oil in the commodities/futures exchanges, with the intention of ACTUALLY DELIVERING the goods, and not just merely speculating/trading paper for profit. So futures can’t be labeled as 100% haram, either.

Therefore, please inform your readers of these issues. Again, I am NOT an MBA, nor do I have a CFA (I happen to be a university dropout unfortunately), and the information above comes from my personal experiences only.

Mas’Salam.