رسول الله صلّى الله عليه وسلّم قال وَهُوَ عَلَى الْمِنْبَرِ -وَهُوَ يَذْكُرُ الصَّدَقَةَ وَالتَّعَفُّفَ عَنِ الْمَسْأَلَةِ- : (الْيَدُ الْعُلْيَا خَيْرٌ مِنَ الْيَدِ السُّفْلَى، وَالْيَدُ الْعُلْيَا الْمُنْفِقَةُ وَالسُّفْلَى السَّائِلَة)
The upper hand is better than the lower one. The upper hand is the one that gives, the lower is the one that asks.The prophet Muhammad (peace be upon him)
This hadith shouldn’t be interpreted as ‘if you give, you’re better than the person you gave to’, as you have no knowledge of the exam that Allah (SWT) has put the other person through. It may have been a much tougher exam than yours has been. Rather the Prophet (peace be upon him) is saying that you should strive to be a giver, and not be content with asking.
In order to be a giver, being good at trading your time for money in a traditional 9-to-5 job is not enough.
To really get ahead in life and build wealth for yourself, your family and those you want to be charitable towards, you have to understand investing.
In this article, I will present a crash course on investing in the stock market from the perspective of an investor who wants to do things in a halal way.
While this article doesn’t intend to make you an expert, it’s meant to give you enough knowledge so that you feel confident enough to get started.
Topics we’ll cover include:
- What are stocks?
- How to buy stocks?
- What to watch out for from a halal perspective?
- How to make money from stocks?
- How to know which stocks are halal?
- How much purification is needed?
- What are the different stock investing strategies?
- Which strategies are halal?
- How to find winning stocks?
- A winning process for picking stocks
- How much can you expect to make from the stock market?
What are Stocks?
Stocks are simply ownership interests in companies. Buying the stock of a company makes you a partial owner of the company. This is why stocks are often called shares, as they represent a share in the company.
Each stock has a ticker symbol, which is a unique identifier used to identify a particular stock.
The ticker symbol for Tesla shares is TSLA
The ticker symbol for Home Depot shares is HD
How to Buy Stocks?
The first step to buying stocks is to open a brokerage account. A brokerage account is where you buy, sell, and hold your stocks. Just like you need a checking account to hold your money, you need a brokerage account to hold your stocks.
For residents of the United States, I like m1 finance because it discourages day trading, as you can only place trades at a particular time of day. I’ll discuss Day Trading in further detail later.
A good starting place for choosing your brokerage account is to simply Google search for the best brokerage accounts in your country or region. Be mindful of the fact that you are looking to open a cash account, not a margin account.
A cash account is an account that lets you buy and sell using only the cash you have in your account. A margin account lets you buy and sell securities with money borrowed from your brokerage. These loans bring benefits to the lender, either directly or indirectly, and therefore, they are ribawi (interest-based) loans that you shouldn’t use.
Even if the brokerage tells you that they aren’t charging interest, they are benefitting in some other way from these loans, or else they wouldn’t be offering them. It is likely that their benefit is through payment for order flow, which simply means they get paid more as their customers make more trades. Therefore, there is riba involved.
Once you’ve opened your brokerage account, you’ll want to fund the account with some money. To do this, you need to connect your bank account to your brokerage account so that you can transfer money between the two.
How to Make Money From Stocks?
There are two ways to make money from stocks and they’re both halal, as long as the company you invest in is halal to profit from (PIF provides halal ratings of different companies here).
1. Capital Appreciation
For example, you buy stock X at $10 per share. With time, the price becomes $15, at which point you sell. Your profit is $5.
Dividends are voluntary distributions that companies make to their shareholders from the extra cash they have.
For example, Company Y has $100 million sitting in its bank account with no plans for how to spend it.
Rather than have the money sitting idly, Company Y decides to distribute $50 million of the money to its shareholders.
You can find out which companies make dividend distributions by looking up the company’s Dividend Yield.
If the Dividend Yield is above zero, it means the company has a habit of paying out dividends to shareholders.
By habit, I want to emphasize that these distributions are voluntary, and the company can discontinue them as it pleases.
It is important to understand that when you own stocks, dividend-paying or otherwise, your money is at risk.
Profit is not inevitable.
However, if you’re doing things right and only investing with the cash you have, the most you can lose is the amount you invested. Accordingly, you should only invest money you can afford to lose entirely. If you need a particular amount of cash for upcoming expenses, you should not be investing this money. Keep it in your cash reserves.
Now for the Muslim investor, the question that suggests itself is:
Which stocks are halal to invest in?
There are different viewpoints on this topic. The process of Practical Islamic Finance for vetting stocks involves answering three main questions:
1- Does a material part of the company’s revenue come from haram?
For example, a company that’s in the business of selling alcohol would not be halal to invest in, considering a material part of their revenue comes from alcohol sales.
2- Does the company rely on riba (interest) in order to operate?
A real estate company may earn its revenue from rent and the capital appreciation of the properties it owns – two sources of income that are completely halal. However, if their business model is not viable without enormous amounts of interest-bearing debt, we view them as reliant on interest to operate, and therefore, we are not comfortable investing in them.
There are different ratios that are often used to determine the level of reliance on riba. Some use debt-to-equity, while others use debt-to-assets. We like to focus on interest income and interest expense, but from experience, there is not one ratio that makes sense all the time. You must understand the story of the company in order to make a proper determination.
3- How does the company serve Maqasid Al-Sharia? The purpose of Islamic law (Al-Sharia) is the realization of the well-being of all stakeholders. With regards to investing in a company, Practical Islamic Finance looks at the impact the company has on the environment, its customers, employees, suppliers and its shareholders, i.e., all of the parties a company has contact with. This is also known as the company’s Environmental, Social and Governance (ESG) impact.
An example of a company that would fail this test would be a manufacturing company with revenue coming entirely from halal, no reliance on interest in its operations, but a supply chain that is tainted with slave labor.
PIF wouldn’t feel comfortable investing in this company from a halal perspective.
You can see Halal reports for different companies here.
We refer to our ratings as comfort levels because it’s rather tough to verify with 100% certainty whether a company is halal or haram to invest in. Our comfort levels are a recognition that we are making judgments based on the information you have accessible to us.
On this topic, you should always be sure to purify the income you earn.
A company you’re comfortable investing in may have an immaterial percentage of its revenue come from sources you’re either unsure of or uncomfortable with. To deal with these situations, designate a portion from your profit commensurate with the suspect portion of the company’s revenue, and give it to charity.
Be generous when you’re determining this portion. If you give more than what you need to, it’s still charity that you will be rewarded for.
عن أبي هُريرة : أَنَّ رسولَ اللَّه ﷺ قَالَ: مَا نَقَصَتْ صَدَقَةٌ مِنْ مَالٍ، وَمَا زَادَ اللَّهُ عَبْدًا بِعَفْوٍ إِلَّا عِزًّا، وَمَا تَوَاضَعَ أَحَدٌ للَّهِ إِلَّا رَفَعَهُ اللَّهُرواه مسلم
The Prophet (peace be upon him) said: Charity has never caused wealth to decrease…Narrated by Muslim
This is not to say that you should give with the expectation that your reward will be in this life and in monetary form, nor should you give with no consideration given for what you need personally, but err on the side of generosity and round up whenever you can. If your calculation for the amount to be purified is wrong, let it be wrong because you overestimated this amount as opposed to underestimated it.
Unlike with the stock market, with charity for the sake of Allah (swt), there is no possibility for loss.
What are the different stock investing strategies?
Easy way of investing
- Focuses on the Long-term.
- It’s easy because it doesn’t require timing the market.
- Involves investing consistently over a long period of time.
A good example of this investment strategy in action is retirement account contributions. Many readers may be employees who have retirement accounts, and in the United States, you can typically choose how much of your paycheck is automatically allocated to your retirement account so that every time you get paid, a portion of your paycheck is invested.
Outside of your retirement account, many brokerages, m1 finance being one of them, offer the option of setting up automatic withdrawals from your bank account into your brokerage account so that it can be automatically invested in the stocks you’ve specified.
Hard way of investing
- Focuses on the Short-term.
- It’s hard because as it is short-term, it requires timing the market.
If you think you can time the market, it’s probably because you haven’t had enough experience with trying to time the market yet.
The market has a unique ability to humble the overconfident.
I’ve been investing and following markets for more than 10 years and I’ve yet to find someone who can consistently time the market.
Given this fact, it seems to me like attempting to time the market is nothing but a fool’s errand.
Which Strategy is Halal?
The sharia does not impose a time horizon on investments.
You can have a long-term or short-term horizon.
This comment should cover the ‘Day Trading: Halal or Haram’ question. If it doesn’t, you may be interested in reading this article.
How to find winning stocks?
To find winning stocks, people either use fundamentals analysis, technical analysis, or a combination of the two.
This type of analysis focuses on the fundamentals of the company, both Qualitative and Quantitative.
Qualitative fundamentals examples include, how good is the company’s product compared to its competition? What is the size of the company’s total addressable market (TAM)? and is the size of TAM increasing or decreasing with time?
Quantitative fundamentals focus on the numbers. Examples include, what is the company’s profit margin? How much growth has the company’s revenue experienced in the past twelve months? What multiple of earnings is the company currently trading at, also known as the PE ratio?
Fundamentals analysis is the type of analysis that I like to focus on.
When choosing companies to invest in, it’s important to stick to your circle of competence. If you understand a particular industry well, you may be better equipped than the average consumer to identify companies that have an edge in the space.
A pharmacist may be better at choosing stocks in the genomics industry.
A doctor may be better at choosing stocks in the Telehealth industry.
A mechanical engineer may be better at choosing stocks in the robotics industry.
This is because their expertise in these fields may allow them to have unique insights that are superior to those of a non-expert.
A common beginner’s mistake in investing is to invest in companies and industries that they don’t understand, simply because they saw someone talking about it on TV or got a hot tip from a friend.
I’ve found one of the best questions to ask when searching for winning stocks is:
Do I think this company is going to have a large impact on a large number of people?
The larger the impact and the larger the number of people impacted, the higher the valuation of the company is likely to become.
Slack is a good example of this. I used Slack every day to run my companies and while its stock was struggling for a while, I was confident that it was a good investment because of the large impact I knew it was having on so many people. Eventually, the company got bought by Salesforce and I was able to make a good profit on that investment.
Technical analysis is built on the idea that past prices are useful in predicting future prices.
A technical analyst will look at a chart of prices and make, buy, and sell decisions based on what they derive from the chart. Some people swear by it, but to be completely frank, I’m not really convinced of its usefulness.
Frankly, it seems like a big waste of time to me.
I read once that a statistician graphed the results of rolling a dice 100 times, and then took the graph to a technical analyst and asked them what they saw in the chart. The analyst said there was a strong sell signal in the chart and that the statistician should sell their position immediately.
A Winning Formula for Picking Stocks
I’ve found no better summary for the winning formula for successful investing than Surat al-Asr in the Holy Quran.
I understand that this surah doesn’t specifically relate to investing in stocks, but I do believe it lays out a winning formula for almost any endeavor you can think of.
Allah SWT says:
By time, all people are at loss, except those who believe, do good deeds, remind each other to hold on to the truth, and remind each other to hold on to patience.English translation of The Holy Quran
If I want to relate this to investing, I’d say; start with a thesis (believe), do your due diligence to verify whether your thesis has merit (do good deeds), process new information fairly without bias (hold on to the truth), and finally be patient.
For the last two, to make sure you’re not being biased and staying patient, it helps to have a group of trusted people that you share your thoughts with.
This is why we’ve created a community of like-minded muslim investors at PIF. To join our newsletter and become part of the community leave your email in the newsletter sign-up form on the sidebar of this site.
Picking stocks individually is not for everyone. After all, doing so requires a lot of time, effort and interest in the topic, and you may not have these things to spare. If this applies to you, you can use mutual funds or Exchange Traded Funds (ETFs). These funds allow you to easily gain exposure to a group of stocks that someone else has picked for you.
Some funds have popped up that cater specifically to Muslims and purport to only carry what they deem to be Halal stocks. Examples of funds that cater to Muslim investors are Sharia portfolio’s (SPUS), Wahed Invests (HLAL) and Amana’s (AMAGX).
If you buy SPUS shares, for example, you automatically gain exposure to the near 200 stocks in this fund without having to buy and manage them individually:
You can also check out the Halal Portfolios section of this blog for portfolios of stocks that we are comfortable investing in from a halal standpoint with a variety different themes and objective such as our Halal version of the S&P and our Halal Dividends Portfolio.
We’re constantly adding more Halal portfolios to Practical Islamic Finance, so make sure to sign up to our mailing list to be notified when new portfolios are added.
Which strategies are halal?
The relevant verse from the Quran is:
بِسْمِ اللَّهِ الرَّحْمَٰنِ الرَّحِيمِ
يَا أَيُّهَا الَّذِينَ آمَنُوا إِنَّمَا الْخَمْرُ وَالْمَيْسِرُ وَالْأَنصَابُ وَالْأَزْلَامُ رِجْسٌ مِّنْ عَمَلِ الشَّيْطَانِ فَاجْتَنِبُوهُ لَعَلَّكُمْ تُفْلِحُونَ
“O you who believe, intoxicants, Maysir, sacrificing for idols and making decisions based on games of chance are sicknesses from the work of Satan, so avoid these things so you may prosper.”
Specifically, about this verse, I’d like to focus on making decisions based on games of chance. Obviously, if you’re making buy and sell decisions based on the outcome of rolling a dice, this is haram.
Some people may argue that technical analysis falls under this category and is, therefore, haram, but I wouldn’t necessarily agree with this. Firstly, technical analysis encompasses a very wide array of analyses, and I may in fact agree with the merits of a limited part of it. Secondly, even though I may disagree with their assessment, people who use technical analysis typically think there is a very logical connection between the things they look for and upcoming price movements.
So, if you think there is merit in technical analysis and a logically coherent argument can be made for it, I wouldn’t feel comfortable saying that what you’re doing is necessarily haram even though I may disagree with your reasoning.
How much can you expect to earn from the stock market?
If you look at the last 100 years, the stock market has returned around 8% on average each year.
Remember that this is an average. Stock market returns may deviate significantly from this 8% average in any given year. An 8% annual return means that, on average, every 9 years, your investment doubles.
This is rather powerful, but it takes patience to experience its effects fully.
Be prepared for periods where you’re not earning any return, or your return is negative.
For example, if you invested all your money in the stock market in December 1999 at the height of the dotcom bubble and didn’t invest anything after that, it would take you 8 years just to get your money back.
Once you got most of your investment back by September 2007, if you kept your money in the stock market, it would have taken you yet another 6 years to get it back again after the great recession in 2008.
If you sold after these 14 years over which you got nothing but your money back, you would have missed out entirely on the period of expansion, right after where the average return was about 15% annually for the next 8 years.
So, the average of 8% annually is only true for people who are in it for the long run. Remember to hold on to patience.
Legendary investors who are at the top of their game can sometimes average higher returns, perhaps in the 30% range annually, but these are few and far between. So, when you see people offering courses on trading or investing and making outlandish return claims, just know that they are likely full of it.
That said, 8% annual return is certainly nothing to scoff at.
The Prophet (peace be upon him) taught us the power of consistency over long periods of time when he said:
قَالَ رَسُولُ اللَّهِ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ: أَحَبُّ الْأَعْمَالِ إِلَى الله أدومها وَإِن قل
A’isha reported Allah’s Messenger as saying, “The acts most pleasing to Allah are those which are done most consistently, even if they are in little amounts.”
To illustrate this in numbers, I created a spreadsheet, which you can download for free, to see what you need to invest each month and over what period, to reach a certain balance in your investment account, assuming you’re earning an annual return of 8%. You can change these assumptions as you see fit. It’s completely free to use, just share this article and make du’a for me.
The spreadsheet shows that if you’re able to put aside e.g., $1,000 per month, increasing this amount by 5% every year, at an 8% annual return, you’ll have $1 million in 20 years. That’s not bad. For many people, that’s retirement.
So, let’s say you get a job paying you $80,000 after college, at age 25. You put aside $12,000 in the first year for investing. At 45, you’re a millionaire. At 65, you have close to $7 million dollars (assuming the 8% average return holds in the future).
The earlier you start, the more powerful this becomes.
A dollar invested today with 8% annualized return, grows to $2.16 in 10 years.
In 20 years, it grows to $4.66.
In 40 years, it grows to $21.72.
Investing early and consistently enables you to enjoy retirement while being generous in your sadaqat (charity) and leave a little something for your heirs after you.
The Prophet (peace be upon him) said:
It is better for you to leave your inheritors wealthy than to leave them poor begging others.
I hope this crash course has given you the knowledge and motivation to get started and plan out your investment journey, if you haven’t done so already.
It’s never too late to start.
Checklist of items to do:
- Sign up to the Practical Islamic Finance mailing list to get consistent doses of investing inspiration.
- Check out the Halal portfolios on our site.
- Download the investment planner spreadsheet I created (completely free).
And get started investing and building wealth for yourself in this life and more importantly, for the hereafter.
رَبَّنَا آتِنَا فِي الدُّنْيَا حَسَنَةً وَفِي الْآخِرَةِ حَسَنَةً وَقِنَا عَذَابَ النَّارِ
Oh Allah grant us that which is good in this life and the next and protect us from the pain of hellfire.The Holy Quran
Disclaimer: nothing in this article was meant to be understood as personalized investment advice. Investing entails risk, including complete loss of capital. Invest at your own risk.