The Art of Investing Ethically in Stock Market

[The original posting can be found at: http://alnaqiy.com/home/article/art-of-investing-ethically-in-stock-market/]

Stock simply known as a share in the ownership of a company. Stock as defined by Investopedia is: “a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings”. It is one of the instruments of investment in equity market.

According to the Securities Commission Malaysia, equity market is: “a market where securities, shares and other exchange traded instruments are bought and sold. Once the shares or securities are bought, the shareholders have the freedom to sell the securities. This has led to the evolution of transfer of instruments that allow shareholders to redeem their money upon disposal of their shares or securities. The activities of buying and selling shareholdings create a ready market that pools resources and provides readily funds”.

People invest in stocks because it has offered the most potential for growth. Bursa Malaysia stated that investing in stocks has consistently proven to be one of the most profitable forms of investment available.

Ethical Investment

For an investment to be permissible for a Muslim, it has to comply with Shari’ah principles and rules of investing. There are five basic principles of investing that determine the halal standing and the smart way of an investment.

The five basic principles of investing in stock market ethically are:

1) Invest in Islamic Way

Muslims are strongly encouraged to invest in Islamic way by choosing to open an Islamic account with your preferred broker company and only invest in Shari’ah-compliant securities. In the process of investing, you need to make sure that you do not consume riba and try very best to avoid unlawful elements in investment such as ambiguity and gambling, for example trading with the promise of massive gains for nothing more than simply guessing their price movements.

Rasulullah (peace and blessings of Allah be upon him) said:

لاَ تَزُولُ قَدَمَا ابْنِ آدَمَ يَوْمَ الْقِيَامَةِ مِنْ عِنْدِ رَبِّهِ حَتَّى يُسْأَلَ عَنْ خَمْسٍ: عَنْ عُمْرِهِ فِيمَا أَفْنَاهُ وَعَنْ شَبَابِهِ فِيمَا أَبْلاَهُ وَمَالِهِ مِنْ أَيْنَ اكْتَسَبَهُ وَفِيمَ أَنْفَقَهُ وَمَاذَا عَمِلَ فِيمَا عَلِمَ

“The two feet of the son of Adam will not move from near his Lord on the Day of Judgement until he is asked about five (matters) concerning his life – how he spent it; about his youth – how he took care of it; about his wealth – how he earned it; and where he spent it; and about that which he acted upon from the knowledge he acquired.” [Al-Tirmidhi]

2) Stay Closer to Allah

Do not allow your investment activities to take you away from remembering Allah and your obligations to Him.

Allah says:

(( رِجَالٌ لا تُلْهِيهِمْ تِجَارَةٌ وَلا بَيْعٌ عَنْ ذِكْرِ اللَّهِ وَإِقَامِ الصَّلاةِ وَإِيتَاءِ الزَّكَاةِ يَخَافُونَ يَوْمًا تَتَقَلَّبُ فِيهِ الْقُلُوبُ وَالأَبْصَارُ ))

“Men whom neither trade nor sale diverts them from the Remembrance of Allah (with heart and tongue), nor from performing As-Salat (Iqamat-as-Salat), nor from giving the Zakat. They fear a Day when hearts and eyes will be overturned (from the horror of the torment of the Day of Resurrection).” [An-Nur 24:37]

3) Stay Focused on Akhirah as the Final Destiny

Indeed, Akhirah is better for us. We need to use our time in this Dunya to work for the Final Destiny and be reminded that this world is just a bridge to an Everlasting abode.

Rasulullah (peace and blessings of Allah be upon him) said:

مَنْ كَانَتِ الدُّنْيَا هَمَّهُ فَرَّقَ اللَّهُ عَلَيْهِ أَمْرَهُ وَجَعَلَ فَقْرَهُ بَيْنَ عَيْنَيْهِ وَلَمْ يَأْتِهِ مِنَ الدُّنْيَا إِلاَّ مَا كُتِبَ لَهُ، وَمَنْ كَانَتِ الآخِرَةُ نِيَّتَهُ جَمَعَ اللَّهُ لَهُ أَمْرَهُ وَجَعَلَ غِنَاهُ فِي قَلْبِهِ وَأَتَتْهُ الدُّنْيَا وَهِيَ رَاغِمَةٌ

“Whoever is focused only on this world, Allah will confound his affairs and make him fear poverty constantly, and he will not get anything of this world except that which has been decreed for him. Whoever is focused on the Hereafter, Allah will settle his affairs for him and make him feel content with his lost, and his provision and worldly gains will undoubtedly come to him.” [Ibn Majah]

4) The Investment Activities Must Comply with ‘Sunnatullah’ (The Law of the Investment)

As an investors, we have to make sure that the investment company have a licence from regulatory bodies. We also have to follow the golden rules of investing smartly. The two main ingredients are first; use proven investment techniques and/or strategies. Secondly; practise sound money management. Sound money management in stock market is knowing how much money we should risk and how many shares we should buy. Basically, it is about how we control our money.

Allah says:

(( سُنَّةَ اللَّهِ فِي الَّذِينَ خَلَوْا مِن قَبْلُ وَلَن تَجِدَ لِسُنَّةِ اللَّهِ تَبْدِيلًا ))

[This is] the established way of Allah with those who passed on before; and you will not find in the way of Allah any change. [Al-Ahzaab 33:62]

5) It Is Encouraged Not to Borrow for the Purpose of Investing, Especially in the Stock Market

In other words, only invest when you have extra funds. When we invest in a stock, there is a risk of losing your investments and in some cases more than your initial investments if one uses the unIslamic trading practice that involves making contra losses. Many stock market gurus do not encourage to start investing in stock market by spending borrowed money.

Islam also takes the matter of debt very seriously and warns against it and urges the Muslim to avoid it as much as possible.

It was narrated from Aishah (ra) that the Prophet Muhammad (peace and blessings of Allah be upon him) used to say in his prayer:

‏اللَّهُمَّ إِنِّي أَعُوذُ بِكَ مِنَ الْمَأْثَمِ وَالْمَغْرَمِ.‏

“O Allah, I seek refuge with You from sin and heavy debt.”

Someone said to him: How often you seek refuge from heavy debt! He said: When a man gets into debt, he speak and tells lies, and he makes a promise and breaks it.” [Al-Bukhari & Muslim]

Wallahua’lam.

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