Is Day Trading Halal or Haram?
I am often asked: is Day Trading Halal or Haram?
Many who ask this question seem to want to day trade for a living.
Let me start by answering the question of whether this is even possible.
Can you make a living Day Trading?
The only way to reliably make a living from Day Trading is to sell courses about Day Trading.
All these “gurus” selling courses on day trading, promising you can make a living day trading are charlatans and frauds. I make no exception.
The best investors in the world are lucky if they can consistently achieve 20%-30% annual returns.
Legendary investor Warren Buffet gained fame by averaging ~20% annual returns with his Berkshire Hathaway investments since 1985.
Peter Lynch, during his historic tenure as manager of the Magellan Fund, averaged ~30% annual returns during his 13-year run.
Day Traders are statistically far less profitable than value, and growth investors like Warren Buffet and Peter Lynch.
So even if a day trader matched Peter Lynch’s returns of 30% annually, and they were day trading with a quarter million dollars, they would still only make $75,000 annually.
Hardly the baller lifestyle these Day Trading Instagram clowns try to portray online.
Yes, sometimes you’ll hear about someone who made an extremely profitable trade. However, more often than not, this same person will go on to lose their profits and then some in the same way they made them. You won’t hear about that latter part because no one is going to buy a course from a loser.
This is why I’ve been pushing M1 finance on my blog and YouTube channel for my U.S. audience. M1 finance only allows you to make trades at certain times of day, which makes day trading impossible.
Now back to the Halal or Haram question…
Is Daytrading Halal or Haram?
In Islam, there is no minimum amount of time you have to wait after purchasing an item before you can sell it.
Therefore, buying and selling something on the same day, technically what Day Trading is, is permissible.
However, with “Day Trading” in a brokerage account, a wrinkle related to Trade Settlement needs to be addressed.
Trade settlement transfers the stock into the buyer’s account and cash into the seller’s account following a trade.
Typically this process takes 2 to 3 business days (settlement time).
Now you may be asking, if it takes 2 to 3 days for a trade to settle, how do people day trade?
To answer this question, we must learn about cash brokerage accounts and margin brokerage accounts…
Cash Brokerage Accounts
Cash brokerage accounts require all transactions in a brokerage account to be done with settled cash.
If you want to buy, you have to have the purchase price settled in cash.
If you sell, you can’t use the proceeds from the sale until the trade is settled and the cash is in your account.
If you have a cash brokerage account with $1,000 dollars in it, you can use your $1,000 to buy 2 shares of XYZ at $500 dollars per share. If, 30 minutes later, XYZ is up $10 a share you can sell your two shares for $1,020.
However, you cannot use the $1,020 from this sale to buy more stock until the trade settles.
What about selling shares in a cash brokerage account?
The prophet peace be upon him told Hakeem bin Hizam, may Allah be pleased with him:
“Do not sell what is not with you.”
Some use this hadith to argue that it is not permissible for a buyer to sell stocks on the same day of purchase because the trade settlement process takes 2 to 3 days. Therefore, possession of the shares takes 2 to 3 days to be established.
Here it’s important to note that most commenters agree that the term “with you” in the aforementioned hadith can be physical or constructive possession.
Constructive possession is when you have control of the item without having physical control.
For example, if someone steals your credit card numbers, they don’t have physical possession of your credit card, and yet they will still be charged with theft since they obtained constructive possession of your card without your consent.
In the case of buying stocks, regardless of when the transaction is settled, the buyer bears the full risks of ownership in terms of profit or loss the moment the transaction goes through. Therefore, I believe constructive possession of the shares has indeed been established even if settlement is not complete.
Accordingly, I don’t see buying shares and selling them on the same day as a violation of the rule “Don’t sell what is not with you” since the buyer has constructive possession of the shares the moment the purchase happens.
So regarding cash accounts, I’m comfortable with what they allow you to do from a halal perspective.
Now let’s talk about the second type of brokerage account, which is:
Margin Brokerage Accounts
Before we talk about Margin accounts, here is a quick refresher on riba.
A loan of money can be one of two types in Islam
- Charitable loan (Qard Hassan), This loan is given as a pure act of charity with no expectation by the lender of any benefit from the loan other than pleasing Allah swt.
- Ribawi loan is a loan wherein the lender expects some worldly benefit to accrue in their favor due to this loan. Being a party to these loans is prohibited in Islam.
Allah’s Messenger (ﷺ) said: cursed is the one who receives riba, the one who pays it, the one who writes it, and the two witnesses, and he said: they are all equal.
Margin accounts involve the broker lending the customer money (providing margin) to trade with.
In the case of margin accounts, the broker will use the assets in the customer’s account as collateral to secure their loans.
Some brokers charge interest on the margin they make available to their customers, while others benefit indirectly through something called “Payment for Order Flow (PFOF).” Without going into too many details, the more trades a client makes, the more money a broker makes from PFOF.
In any case, what is certain is that no broker extends these loans as an act of charity.
I challenge anyone to find a broker anywhere in the world that extends loans to their clients, i.e., makes margin available to them, as an act of charity.
If you look closely, you’ll inevitably find that the broker benefits one way or another.
The benefit the broker hopes to get from extending margin loans is Riba, even if they don’t involve interest.
Interest is only one form of riba but not the only form. Any planned or expected benefit to the lender from lending is riba and prohibited in Islam.
The term Islamic Margin Account is an oxymoron. You can’t have Islamic lending for profit. It’s like saying halal pork. It doesn’t exist.
Since trades take 2 to 3 days to settle, you need to have a margin account to use the proceeds from a stock sale on the same day. In other words, you need a broker willing to give you a short-term loan until the cash from your sale settles in your account.
This short-term loan, in my opinion, involves riba and is haram.
- There is no minimum required time to hold on to an asset before selling it in Islam.
- There are no issues with purchasing and then selling a stock on the same day.
- If you sell a stock and then use the proceeds of the sale before the trade settles, you are using margin i.e., borrowed funds. Since the broker is giving you access to these funds, expecting to benefit from this, you are involved in a ribawi loan.