Day Trading: Halal or Haram?
I often get the question: is Day Trading Halal or Haram?
The impression I get from many people who ask this question is that they are considering whether or not they can make a living from day trading.
Let me start by answering the question of making a living day trading.
All these trading gurus that are selling courses on day trading, promising you that 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 are able to consistently achieve 20%-30% returns.
Legendary investor Warren Buffet is known to average ~20% annual returns with his Berkshire Hathaway investments since 1985.
Peter Lynch in his historic tenure as manager of the Magellan Fund averaged ~30% annual returns in his 13 year run.
Day Traders are statistically far less profitable than value and growth investors like Warren Buffet and Peter Lynch are.
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. Half these bozos couldn’t tell the difference between common stock and livestock.
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 his profit in the same way they made it and much more after that.
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 I think discourages day trading.
Halal or Haram?
There is no restriction in Islam on buying and selling the same asset on the same day.
Put differently, there is no minimum amount of time you have to wait after purchasing an item before you can sell it.
However, with Day Trading there is a wrinkle that needs to be addressed related to Trade Settlement.
Trade settlement is the process of transferring 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 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 proceeds for this sale to buy more stock until the trade settles.
Some have argued that since it takes 2 to 3 days for a trade to settle, it is impermissible for the buyer to sell on the same day of purchase because the stocks are not yet in the buyer’s account i.e. possession hasn’t been established yet.
There are a number of relevant hadiths here, perhaps the most well-known is the authenticated hadith of Hakeem bin Hizam, may Allah be pleased with him, wherein the prophet peace be upon him tells Hakeem:
“Do not sell what is not with you”
Here it’s important to note that most commenters on the topic agree that the term “with you” can either be physical possession or “constructive possession”.
Constructive possession is when you have control of the item without having physical control.
So for example, if someone steals your credit card number 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, it is my view that constructive possession of the shares has indeed been established.
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” despite the trade not being settled yet because the buyer has constructive possession of the shares the moment the purchase happens.
So with regards to cash accounts, I’m fine with what they allow you to do from a halalness perspective.
Now let’s talk about, the second type of brokerage account which is:
Margin Brokerage Accounts
Before we talk about Margin accounts, a quick refresher on riba.
A loan of money can be one of two types in Islam
Charitable loan (Qard hassan). This is a loan 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. This is a loan wherein the lender expects some worldly benefit to accrue in their favor as a result of this loan. Being a party in 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) which the customer can use to do things they aren’t able to do in a cash account.
In the case of margin accounts, the broker will use the assets in the customer’s account as collateral to secure their loans to the customer.
Some brokers charge interest on the margin they make available to their customers while others simply extend margin to enable customers to make more trades which the broker will profit from indirectly through the profit from order flow they collect.
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 is benefitting one way or another.
So long as this margin, these loans, are not extended as an act of charity they are ribawi loans. They involve riba. Even if they don’t explicitly involve interest. Interest is one form of riba but isn’t the only form. Any planned or expected benefit that accrues to the lender from lending is riba and is 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 settle 2 or 3 days later, in order to sell a stock and use the proceeds from that sale on the same day, you need to have a margin account. In other words, you need to have a broker that is 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 amount of time you have to hold on to an asset before you can sell it in Islam.
- If you purchase a stock and sell it on the same day, no problem.
- 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, and since the broker is giving you access to these funds with the expectation of benefitting from this, you are involved in a ribawi loan.