Investments in the stock market halal in Islam... waswas with Masters Dissertation

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Aishath

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Asalaamu Alaikum,

Right now I am in the middle of my masters dissertation and my chosen topic was investigating the Madoff scandal that occurred in USA - for those of who might not have heard of Madoff (I only heard of him very recently myself) he ran a huge investment fraud (Ponzi scheme) and scammed billions of dollars from thousands of investors... typical fraud story really.

First off let me say that i do often suffer from waswas so what I might say below might just simply be due to me being a bit paranoid and worried about nothing.

In my dissertation, I need to write out a recommendation section for both the regulators of the industry and more importantly for individual investors - how to identify a financial fraud, psychologically trying to help the victims of the fraud and finally (and here's what is worrying me) help investors understand the basics of investing on the stock market, bonds, mutual funds and whatnot.

When I started the research topic I didn't consider the possibility that some of these investment methods may not be halal.. and I am feeling a bit strange about having to write out this section. I am wondering if this is a sin I am committing by writing out advise for investors in how to buy stocks etc. is this something that is haram in islam (I assumed it could be as it seems to be linked in a lot with companies dealing with interest rates and so on and in some ways it is a bit of a gamble too that people take?).

I am going to stress on portfolio management and spreading out investment risk through diversification. But in order to really complete that section well, I do need to focus a bit on trading in stocks as well. Am I okay in writing this section out as it is basically going to be advice I'm giving (granted advice from a student and has the possibility that beyond the markers of the dissertation it won't go further than that). in my head it feels like I'm basically advising someone to 'drink safely' rather than 'stop drinking' if that makes sense.

Insha Allah someone can help me out here.
 
Waalikum Assalaam

Actually the things you mentioned above are one of those things which makes me take a step back while studying accounts and fianance.If you can't take a step back then finish it off quickly and try not to make your earnings from those banks or corporates who are working with riba money or direct dealing with usury etc.I've yet to sort out ways about how asset and risk management is related to this but all in all i don't think if i am going to be brewer i will came out as honey fetcher.Anyway,there is more opinion than advice in my post.So Think yourself or read the subject on your own,Reading and concluding things yourself makes more satisfied in reaching your decision.Khair Insha-Allah

Assalamu Alaikum
 
I need to compile my notes on the matter. Should be done by the end of this week.

Edit: I've got half of it done. Will post tomorrow (sunday) Insha'allah
 
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aamirsaab said:
I need to compile my notes on the matter. Should be done by the end of this week.
Click to expand...

JazakAllah Khair brother!!!!

UPDATE: I saw your edit just now. JazakAllah Khair brother. I really appreciate the time and effort you are taking in doing this for me!!
 
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Often in class I do really wonder about my decision to have studied Accounting especially when they teach us topics based on riba etc. But Insha Allah after this I am only going to work within an Islamic bank or Islamic financing and Insha Allah stay well away from companies involved in haram.

Also, I would really like forum members' opinions on this which is why I've posted here without coming to my own conclusions on the matter :) JazakAllah Khair.
 
I wrote this yesterday but wasn't able to post it.

imo purchasing stock in itself is not haram as it is the purchasing of a share in a company. however, the way it is done today, with the price of shares related to supply and demand and the prices being so prone to fluctuations and not necessarily being related to the value of the company, is what it makes it so risky and like gambling. there are cases where people buy overpriced stock and when the price comes down, they lose most or all of their money.

I think if you write something advising people to invest wisely and help them in stock valuation, then that's a good thing. it is like advising someone in doing business. if they do haram business, it's not your fault. You can add a note about not investing in haram companies and that interest and wine is forbidden, etc.
 
Aishath said:
Often in class I do really wonder about my decision to have studied Accounting especially when they teach us topics based on riba etc. But Insha Allah after this I am only going to work within an Islamic bank or Islamic financing and Insha Allah stay well away from companies involved in haram.

Also, I would really like forum members' opinions on this which is why I've posted here without coming to my own conclusions on the matter :) JazakAllah Khair.
Click to expand...

sister, I too studied accounting as it was a subject i loved since the 8th grade. Then subhan-Allah I found a great islamic economics course in Syria which I studied for a few years. That opened possibilities to work in an islamic bank. You too can do that or you can work in an islamic accounting and auditing firm or something or you can start one of your own. Bahrain has an organization for accrediting islamic accounting and auditing firms. you might want to look it up. They have books to that you can buy from them and study. CFC Center (I believe in Canada) also has islamic finance certification programs that you might want to check out. So there are a lot of options and you don't have to worry that you'll be forced to work with riba.
 
WRITER said:
I wrote this yesterday but wasn't able to post it.

imo purchasing stock in itself is not haram as it is the purchasing of a share in a company. however, the way it is done today, with the price of shares related to supply and demand and the prices being so prone to fluctuations and not necessarily being related to the value of the company, is what it makes it so risky and like gambling. there are cases where people buy overpriced stock and when the price comes down, they lose most or all of their money.

I think if you write something advising people to invest wisely and help them in stock valuation, then that's a good thing. it is like advising someone in doing business. if they do haram business, it's not your fault. You can add a note about not investing in haram companies and that interest and wine is forbidden, etc.
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JazakAllah Khair for the response. how would I be able to go about saying don't invest in companies that involves riba etc though... I mean my dissertation is not really anything to do with Islamic investments. It was investigating an investment fraud that occurred so at the end I am meant to just say this is what advice I would give. If I then add that bit about riba and wine... I am wondering if that is going to sound out-of-the blue ? Do u see what I mean?
 
WRITER said:
sister, I too studied accounting as it was a subject i loved since the 8th grade. Then subhan-Allah I found a great islamic economics course in Syria which I studied for a few years. That opened possibilities to work in an islamic bank. You too can do that or you can work in an islamic accounting and auditing firm or something or you can start one of your own. Bahrain has an organization for accrediting islamic accounting and auditing firms. you might want to look it up. They have books to that you can buy from them and study. CFC Center (I believe in Canada) also has islamic finance certification programs that you might want to check out. So there are a lot of options and you don't have to worry that you'll be forced to work with riba.
Click to expand...

JazakAllah Khair for this information sis. Alhamdulillah in my home country we have an Islamic bank as well and Insha Allah I hope to start working there which would be a halal alternative. Recently I have been leaning toward the idea of teaching a lot though.. I was thinking this might be a more suitable career for me and Insha Allah I will post more about that as the time comes as I wanted to ask somethings about that. But for the time being, I am too far into this course in UK to be able to stop and change now (without upsetting many people I guess :S).
 
In terms of investment advise, it helps to have as much information as possible:

Shares in issue - self explanatory
Market Price - as above
Market capitalisation - market value of the firm; multiply the number of shares by market price
Earnings - profit
Earnings per share - profit divided by number of share
Distributed profit (see below)
Dividend per share Distributed profit/Shares in issue
Payout ratio - how much of the earnings are given to shareholders
Earnings ratio - ((earnings/shares in issue)/market price)

(You could go to town on each of those things if you wanted. Some of them the investor has to work out, others should be available by the company anyway)

Investors should also understand how share prices are influenced by the following:

Interest rates
Risk aversion
Next dividend
Profit growth
Asset specific risk (includes capital structure, Business activity and Senior management)

(again, these are basically topics in and of themselves - plenty to write about)

Additionally, the use of financial press and the stock exchange can provide valuable data. For instance, it's possible to gather previous data and extrapolate based on current/existing market trends to make an informed decision. It's by no means gauranteed of course, but it can help.

In terms of the disertation it self, you should include something about the lemon problem (if you haven't already) - that's always a good thing to write about in finace/economics.

Source:
Financial Markets and Institutions by Peter Howells and Keith Bain.
 
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Greetings and peace be with you Aishath;

in my head it feels like I'm basically advising someone to 'drink safely' rather than 'stop drinking' if that makes sense.
Click to expand...

makes sense to me.

The following are just my own thoughts after dabbling in the stock market for a couple of years, purely in an amateur way.

From what I understand the stock market started several centuries ago in the shipping trade. It was a costly and perilous adventure to send a ship on a journey of several months in the hope it might be profitable. Very few people could afford the costs or the risks on their own so it was often split between a number of investors. If it was a true investment then they would wait for the ship to return, sell the cargo and divide the profits proportionately.

It seems that some astute dealers found ways to sell their share in a ship before it returned home and make a profit, the sale rested on pure speculation that it would be a profitable cargo. The buying and selling of shares in the shipping trade became profitable and spread to other industries to become the stock market we know today.

I think the stock market is more to do with gambling and has little to do with investing in companies. In this electronic age you can buy stock and sell it within hours at a profit, this does not help the company you have brought shares in. There are now very clever people who can set up computers to buy stock then sell it a few seconds later at a profit.

I believe the driving forces behind the stock market are speculation, gambling, greed and fear; it would be hard to justify any of these characteristics with a faith in God. Many years ago and before I found my faith in God; I speculated on short term gains for a while; I was more successful betting in times of fear and bad news, this is because of how stockbrokers control the market.

Say a share closes tonight at £5, then first thing tomorrow morning they announce some good news, the stock brokers will immediately put the price up to say £6. This is good news for anyone already owning shares in that company, but if you want to buy they have already factored in a 20% increase to cover the price of that good news. I found it more difficult to make short term gains on good news for this reason.

When it came to bad news the stock brokers seem to overreact due to the fear factor. Say a company share closes tonight at £5, and they announces some bad news first thing the following morning, the price might drop to £3, but you need nerves of steel to gamble that it is an overreaction. The analogy of dropping a ping pong ball from waist high comes to mind; it drops quickly, and bounces back to a lower level each time until it eventually stops bouncing. Big investors make huge profits after a stock market crash, they often call this a price correction. This appears to be because prices have been driven up to high by speculation so the valuations are founded on fiction, a third needs to be wiped off to bring the prices back to some kind of reality.

I think ethical investment might be a company where a large percentage of the workforce own shares in their own company. This would give the workforce an incentive to invest their time in the company and make it work better, just some thoughts.

In a strange way if you were good at spotting investment trends and making money from the market, you should strip the assets of companies that deal in alcohol, tobacco, gambling, guns and bombs.

Please feel free to disregard the above as most of it is just thoughts from my own experience with the stock market.

I hope you do well with your dissertation,

Eric
 
Aishath said:
JazakAllah Khair for the response. how would I be able to go about saying don't invest in companies that involves riba etc though... I mean my dissertation is not really anything to do with Islamic investments. It was investigating an investment fraud that occurred so at the end I am meant to just say this is what advice I would give. If I then add that bit about riba and wine... I am wondering if that is going to sound out-of-the blue ? Do u see what I mean?
Click to expand...

then jsut make it general, showing people how to make wise decisions, how to figure out whether an investment is over-priced, under-priced, etc. Since investing in stock isn't by itself haram, there should be no problem with writing such a dessertion.
 
one of my teachers told us that if you want to invest, you should divide your money into three: set aside 1 part as cash (deposit in bank). use the second part to buy real estate (and possibly gold which is also a more trustible form of investment). and invest the third part (in business or stock). Never invest all your money/savings in business/stock because of the high risk involved.

Personally I think one's monthly income could be divided into 5 parts: 1 part can be used (for expenses, etc. 2nd part can be spent in charity or to sponsor a relative. 3rd part could be saved (as cash deposit in bank) for later use. 4th part can be used to buy real estate (or gold). 5th part can be used as investment in business/stock.
 
Eric H said:
Greetings and peace be with you Aishath;



makes sense to me.

The following are just my own thoughts after dabbling in the stock market for a couple of years, purely in an amateur way.

From what I understand the stock market started several centuries ago in the shipping trade. It was a costly and perilous adventure to send a ship on a journey of several months in the hope it might be profitable. Very few people could afford the costs or the risks on their own so it was often split between a number of investors. If it was a true investment then they would wait for the ship to return, sell the cargo and divide the profits proportionately.

It seems that some astute dealers found ways to sell their share in a ship before it returned home and make a profit, the sale rested on pure speculation that it would be a profitable cargo. The buying and selling of shares in the shipping trade became profitable and spread to other industries to become the stock market we know today.

I think the stock market is more to do with gambling and has little to do with investing in companies. In this electronic age you can buy stock and sell it within hours at a profit, this does not help the company you have brought shares in. There are now very clever people who can set up computers to buy stock then sell it a few seconds later at a profit.

I believe the driving forces behind the stock market are speculation, gambling, greed and fear; it would be hard to justify any of these characteristics with a faith in God. Many years ago and before I found my faith in God; I speculated on short term gains for a while; I was more successful betting in times of fear and bad news, this is because of how stockbrokers control the market.

Say a share closes tonight at £5, then first thing tomorrow morning they announce some good news, the stock brokers will immediately put the price up to say £6. This is good news for anyone already owning shares in that company, but if you want to buy they have already factored in a 20% increase to cover the price of that good news. I found it more difficult to make short term gains on good news for this reason.

When it came to bad news the stock brokers seem to overreact due to the fear factor. Say a company share closes tonight at £5, and they announces some bad news first thing the following morning, the price might drop to £3, but you need nerves of steel to gamble that it is an overreaction. The analogy of dropping a ping pong ball from waist high comes to mind; it drops quickly, and bounces back to a lower level each time until it eventually stops bouncing. Big investors make huge profits after a stock market crash, they often call this a price correction. This appears to be because prices have been driven up to high by speculation so the valuations are founded on fiction, a third needs to be wiped off to bring the prices back to some kind of reality.

I think ethical investment might be a company where a large percentage of the workforce own shares in their own company. This would give the workforce an incentive to invest their time in the company and make it work better, just some thoughts.

In a strange way if you were good at spotting investment trends and making money from the market, you should strip the assets of companies that deal in alcohol, tobacco, gambling, guns and bombs.

Please feel free to disregard the above as most of it is just thoughts from my own experience with the stock market.

I hope you do well with your dissertation,

Eric
Click to expand...

This is where stock valuation courses come handy. I did one such course but forgot most of the stuff i learned. in general one should look at the company's current and previous financial statements (balance sheet, income statement, cash flow statement, etc). Cash flow statement is necessary because income and expenses are recorded based on accrual system and not cash system. In this system revenue/income is recorded when incurred not when received and expenses are recorded when incurred not when paid. So a company might show net income but have no money. if a company doesn't have money to pay current liabilities and debt that becomes due, it could get into trouble. no matter how high the revenue/net income is, if cash flows are not sound, the company could go into default and that would cause a decrease in stock prices, not to mention bankruptcy. one should also know how to calculate ratios from the information in the financial statements, such as debt-to-equity ratio, return on investment, etc.

as for investment in stock, one of my teachers told us that a muslim should buy stock for ownership in the company and not for earning a profit by reselling the stock at a higher prices.
 
Oh JazakAllah Khair everyone for such detailed replies. Insha Allah I shall go through all of these carefully and reply back here asap.

Wasalaam
 

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