A CFD is a contract between two parties, a buyer and a seller, where the buyer of the contract agrees to pay the seller the difference between the current price of an asset and its price at contract time.
So if the asset’s current price is $100 and it becomes $150 at contract settlement time, the buyer owes $100-$150 = -$50 i.e. the buyer is owed $50 from the seller.
If on the other hand the price of the asset is $50 at contract time, the buyer pays the seller $100 – $50 = $50.
The appeal of Contracts For Difference (CFD) is that they enable a trader to gain access to the price movements of the underlying asset without having to pay the full price of the asset.
This happens through leverage.
Stock XYZ is trading at $100.
CFDs on XYZ stock have a margin rate of 10%
This means you can gain access to the price movement of XYZ stock for just 10% of its price i.e. $10
Alternatively, you have to pay $100 if you wanted access to XYZ’s price movement through buying the stock.
Halal or Haram?
My answer to this question will ignore the use of margin and interest with CFDs because I know if I focus on these matters someone is going to ask: what if I don’t use margin or the margin I use does not charge interest?
There is something much more fundamentally wrong about CFDs:
CFDs create risk without any corresponding prospects for value creation.
How Do CFDs Create Risk?
If I buy a share of Apple stock, the risk of ownership of that 1 share is transferred from its previous owner to me.
If I sell a share of Apple stock, the risk of ownership of that 1 share is transferred from myself to the buyer.
In both cases, the amount of total risk in the market did not change. Only the party assuming this risk changed.
On the other hand, the risk that comes into being from writing a CFD contract did not exist beforehand.
When one sells a CFD contract on Apple stock for example, everyone who ownes Apple shares still bears the same amount of risk, except now the buyer and the seller in the CFD also assume the price risk of Apple’s shares.
Therefore, the total risk in the market has increased.
A creation of risk occurred.
In Islam, whenever there is a creation of risk, there must a clear justification for it.
What is the justification for creation of risk through CFDs?
There is none.
It’s a completely valueless activity.
One may argue that it’s not valueless if you make money. However, whatever money is made from a CFD is someone else’s loss.
The sum is always zero.
For long time followers of this blog they know that the creation of risk in hopes of material gain with no prospects for creating any value is the definition of Al-Maisir (roughly translated to gambling) which is prohibited in Islam.
بِسْمِ اللَّهِ الرَّحْمَٰنِ الرَّحِيمِيَسْأَلُونَكَ عَنِ الْخَمْرِ وَالْمَيْسِرِ قُلْ فِيهِمَا إِثْمٌ كَبِيرٌ وَمَنَافِعُ لِلنَّاسِ وَإِثْمُهُمَا أَكْبَرُ مِن نَّفْعِهِمَا وَيَسْأَلُونَكَ مَاذَا يُنفِقُونَ قُلِ الْعَفْوَ كَذَٰلِكَ يُبَيِّنُ اللَّهُ لَكُمُ الْآيَاتِ لَعَلَّكُمْ تَتَفَكَّرُونَ
They ask you [O’ Muhammad] concerning alcohol and maysir. Say: they contain great sin and benefit for people, but their sin is greater than their benefit. And they ask you what should they give to charity? Say: that which is more than your need, And so Allah shows you wisdom so that maybe you will think.[Quran 2:219]
بِسْمِ اللَّهِ الرَّحْمَٰنِ الرَّحِيمِ
يَا أَيُّهَا الَّذِينَ آمَنُوا إِنَّمَا الْخَمْرُ وَالْمَيْسِرُ وَالْأَنصَابُ وَالْأَزْلَامُ رِجْسٌ مِّنْ عَمَلِ الشَّيْطَانِ فَاجْتَنِبُوهُ لَعَلَّكُمْ تُفْلِحُونَ إِنَّمَا يُرِيدُ الشَّيْطَانُ أَن يُوقِعَ بَيْنَكُمُ الْعَدَاوَةَ وَالْبَغْضَاءَ فِي الْخَمْرِ وَالْمَيْسِرِ وَيَصُدَّكُمْ عَن ذِكْرِ اللَّهِ وَعَنِ الصَّلَاةِ فَهَلْ أَنتُم مُّنتَهُونَ
“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. Satan desires to create enmity and hatred amongst you through intoxicants and gambling and to stop you from praying and remembering Allah. So will you abstain from these things?”[Quran 5:90-91]
It is clear to me that trading CFDs for profit is a form of gambling [Maysir] which Islam strictly prohibits.
…and Allah knows best.