Islamic Trading
The concept of halal trading has generated much discussion, dividing scholars and investors alike. But as interest in swing trading grows, answering these questions becomes ever more pertinent. So, is online trading halal or haram? And can Islamic trading ever be profitable? In this guide, we look at what it means to trade in accordance with Sharia law. We’ll also explore some of the best halal brokers and Islamic trading accounts.
Top Brokers With Islamic Accounts for United States
Note, this article does not seek to give religious guidance – it presents various views following in-depth research. Consult a local religious leader for advice specific to your circumstances.
What is Halal Trading?
Swap-free or halal trading refers to investing in line with Sharia law. Sharia law centers around the concept of social consciousness and justice. Therefore, halal investments encourage Muslims to invest responsibly and ethically.
Sharia finance should not be dismissed as unprofitable. Laws do not prohibit making money, rather they emphasize mutual benefit and ethical practices. They propose a balance between profit and religion, family and society.
The principles of Islamic finance have been around for centuries. But as the global Muslim population grows, so too does the demand for investment advice. Islamic finance has seen consecutive growth year on year and today is estimated to be valued at over $2 trillion. In response to growing demand, we are seeing an increasing number of brokers offering Islamic or swap-free trading accounts with competitive rates and flexible conditions.
Is Swing Trading Halal or Haram?
Swing trading refers to the buying and selling of assets over a few days, as opposed to day trading or intraday trading which is executed within a single session. While the principles that govern Islamic life are clear, their application to swing trading is less clear. To paint a more accurate picture, we’re going to break down the application of Sharia law by instrument in more detail below.
Is Forex Trading Haram or Halal?
Currency trading is becoming increasingly accessible. With low deposit requirements and a multitude of brokers to choose from, forex investing offers the potential for decent returns. It is not hard to see why it has become one of the most traded asset classes globally.
On the surface, forex trading appears to be halal. If you were simply to buy currency and trade it a year later, this would be considered a halal forex transaction. But when you start to consider factors such as leverage, it is not so clear-cut:
- Leverage – Offers the opportunity to make a greater return on a comparatively small investment. However, this would technically be considered a loan. And under Sharia law, you are not able to borrow money for the sole purpose of making a profit.
- Hand-to-Hand Exchange – The prophet, Mohammed, outlines that trading is permissible so long as it is “hand-to-hand.” In the past, it would have meant that trading should take place face-to-face when the two parties are present. But in today’s digital world, this is not so easy.
- Ownership – Another point of contention. Speculation or “gambling” on risky hypotheticals is not encouraged. With forex trading, you are merely speculating on whether the price will increase or decrease. Can this be considered halal?
So, What is the Solution?
Fortunately, many forex brokers now offer Islamic or swap-free accounts which do not charge interest on payments. To ensure they are competitive, they instead charge increased commissions on spot forex traders. Some argue that this is a disguised interest component, but others are content with this method.
Many scholars also contest that if an exchange takes place in the same sitting, i.e., an exchange is entered and exited immediately, it qualifies as a hand-to-hand exchange. Given that most forex trades tend to be executed instantly, they would qualify under this ruling. However, this does suggest that non-market trades such as stop and limit orders are haram.
The concept of ownership is trickier to answer definitively and may vary on an individual basis. While it may be generally accepted, we would urge you to consult a trusted religious authority who can consider your personal situation and advise appropriately.
Overall, most scholars agree that forex trading is halal or permissible.
Is Buying Shares Halal?
It is generally accepted that buying and selling stocks is permitted under Sharia law. Trading shares is much like owning part of a business. As long as it is a legitimate business, there should not be an issue. Examples of permissible businesses would include real estate, shipping, manufacturing, and medical equipment.
Of course, Muslims would not be permitted to buy shares in companies that engage in haram activities such as gambling, alcohol, or pornography.
Where it gets a bit trickier is when some of the company’s practices are halal and others would be considered haram. For example, transportation companies are often financed by riba-based loans. These companies are often referred to as ‘mixed’ companies. In this instance, to comply with Islamic practices, Muslims should not buy shares.
With that said, some argue that you can still invest if only a small percentage of a company’s dealings are considered haram. The recommendation is that you should give away the percentage of profits created by the haram section of the business. For example, you would donate 5% of your earnings to an online charity.
This is not accepted by all. So if you have any doubts, we recommend speaking to a local religious authority.
Is Binary Options Trading Halal?
Binary options trading is not usually considered halal for several reasons. Firstly, binary options represent highly risky instruments, so much so that they are banned in many global markets. Although some would disagree, binary options are essentially a form of gambling. And as outlined under Riba, Muslims should not trade with interest and should not gamble.
Also, the nature of binary options’ contracts determines that there must be a winner and a loser. Not all parties stand to benefit from the trade, so the trade does not uphold the social values necessary to comply with Islamic principles.
There is an argument that if the individual trading knows enough about the trade at hand, the level of risk diminishes to where it becomes permissible and not considered “gambling.” Of course, this may be a stretch even for the most experienced traders.
Halal Trading Instruments
Whilst binary options are probably off the table, there are several permissible instruments available to trade, including:
- Gold – Considered a safe and traditional investment. It tends to appreciate in value, is easy to obtain, and is not in breach of Sharia law. Gold is also a good way to diversify risk across a portfolio.
- Sukuks – An alternative to traditional bonds. Sukuks do not bear interest. They are usually asset-based and are deemed conservative investments because they form part of the fixed income market.
What Elements are not Considered Halal?
There are several things to watch out for that usually signify whether something is halal or haram:
- Interest – Investments that involve charging interest are prohibited. Interest is considered an exploitative practice; it does not comply with the principles of Islam.
- Excessive Risk – Participating in contracts where there is excessive risk is also not permitted. Partaking in short-selling or utilizing high leverage is haram.
- Prohibited Activities – Investing in businesses or contracts that support prohibited activities such as gambling or the trade of alcohol. Prostitution, cigarettes, pornography, and industries relating to pork production or consumption are also not permitted.
- Speculation – In accordance with Sharia Law, speculation or gambling is not permitted. Investments that include contracts where ownership is dependent on risky future events are not permitted. Owing to their high levels of risk, binary options would likely fall under this umbrella.
What is Riba?
Riba is a term that refers to the concept of interest or unjust gains made during investment that benefits an individual at the expense of others. Riba is condemned by the Quran as exploitative.
The concept of riba al-nasi’ah refers to the increase of wealth over time. Bonds would fall under this category and are therefore not typically viable for Muslim investors.
Fortunately, many top online swing trading platforms now offer swap-free accounts that negate overnight charges, or interest fees, for Islamic traders.
Benefits of Halal Trading
- Risk – A measured approach to risk means that halal investments could be considered safer than an average portfolio. Halal investments are also less susceptible to market fluctuations. This was seen during the global financial crises in which halal investments were, on average, not as adversely affected.
- Social responsibility – Approaching investment and finance from a point of social justice means that investment is more likely to foster a just distribution of wealth in addition to growth in ethical sectors.
Drawbacks of Halal Trading
- Limited – The key drawback of halal swing trading is that there are fewer options available on the market. It remains a fairly new concept in global trading, so finding the right opportunities can be more challenging.
- Research – The amount of due diligence required to ensure that an opportunity complies with Sharia principles is greater than a traditional investment. Muslim traders need to do thorough research to ensure they comply with the principles of Islam as well as determine their strategic value.
- Diversification – As mentioned above, halal investments require time and consideration. This means that portfolios tend to be less diverse and slower to grow.
Islamic Trading Accounts
Halal trading will depend on your actions and the conditions offered by your broker. Whether your investment is in stocks, shares, or forex, your broker generally needs to meet the following requirements to be considered halal:
- Interest-free – To avoid breaking the rules determined by riba, there must be no interest offered on any transaction. Applied interest will deem the contract invalid or haram.
- Instant execution – Immediate execution of trades helps to satisfy the rule of prompt hand-to-hand exchanges between parties.
- Instant settlement – Avoid accounts where trades are automatically rolled over to the next day as these can carry interest charges which are prohibited.
Final Thoughts
Swing trading can not only comply with Islamic principles, but it can also be profitable. Brokers are responding to a growing demand for interest-free, socially conscious halal investment opportunities across stocks and forex.
While it’s not overly complicated for swing trading to follow Islamic law, it does require additional time and research. The onus is on the individual to ensure that any investment proposition aligns with Islamic principles.
FAQ
Is Intraday CFD And Commodity Trading Halal Or Haram?
Intraday trading, much like day trading, can be halal if certain requirements are met. Trades should be interest-free, executed instantly, and only engage with halal industries. Gambling, alcohol, and pornography are not typically considered halal.
Is Forex Or Currency Trading Legal In Islam?
Yes, forex trading can be executed in line with the principles of Islam. Forex trading refers to the exchange of currencies and therefore does not go against fundamental principles. Traders should avoid using leverage which is considered haram.
Is The Stock Market And Buying Stocks Haram?
Stock trading can technically be considered both halal and/or haram. To be permissible, stocks should be traded only in companies that engage in authorized activities and are traded without interest.
Where Can I Find An Islamic Forex Broker?
See above for some of our favorite halal or Islamic brokers. Each caters to a range of strategies as well as varying investment requirements. As online trading grows, so too does the number of compatible brokers and platforms.
What Is A Good Online Islamic Investment?
A good investment will depend on several factors. What you would consider good, someone else might not. Do your research, make sure it complies with the principles of Islam, and consult a religious authority where needed.
Is Investing Haram?
Investing does not have to be haram. With an increasing number of online brokers offering swap-free trading accounts and ethical instruments, Muslim traders have more choice when registering with platforms.