Have you ever opened Google and typed in ‘what are stocks and shares’? The first set of results you’ll notice are adverts from trading platforms (including some platforms we have reviewed). Scroll down a bit more and you’ll get to the information you need. So, what are they?
Well, according to Investopedia, one of the most popular websites in the world for stock market information, this is the general definition:
"stocks" [and shares] …is often used to describe a slice of ownership of one or more comapanies.."
This makes a lot of sense. In fact, according to the London Stock Exchange itself:
"If you decide to invest in them you will become a part-owner in the company and benefit from its success, but you also face some risk if it doesn’t perform well."
Likewise, if you were to register a business at Companies House, you’d be asked about who the shareholders are and how many shares each shareholder has. Companies House defines a shareholder in the following way:
"A Sharehoder is a company member who owns shares in the company."
What the above definitions have in common is the idea of ownership. Nice and simple, right?
Wrong.
When it comes to buying shares on the stock market, the above definitions cannot be relied upon by UK Muslims. Does that mean Investopedia et al. has gotten it wrong? No, not necessarily. Investopedia et al. has provided that definition for a different audience. And perhaps their definition holds true for most investors and traders around the world. But the definition does not take into account:
i) English law
ii) Islamic law
So what does the law of England say about stocks and shares?
Well, in 1948 the Court of Appeal declared that “shareholders are not, in the eyes of the law, part owners of the company”.
Hang on, doesn’t that go against the definition of Companies House, also of the same jurisdiction? Could it be that since 1948 how we understand 'shares' and 'shareholders' has changed?
Actually, in 2003, the House of Lords reaffirmed the 1948 ruling...in unequivocal terms.
It would seem the definition of shares varies between countries and perhaps even institutions within a country (for example the courts and administrative institutions (such as Companies House)).
So, if shares do not give legal ownership of the underlying assets of a firm, what do they give?
Buying shares gives the shareholder a bundle of rights- such as the right to attend and vote at the AGM.
So how does Islam view stocks/ shares?
As I explained in another article, there is no direct mention of the stock market or shares in the Quran or hadiths. But then again, the Quran and hadiths rarely mention things directly by name. Let us consider the highly addictive drug heroin, which began to be mass produced relatively recently in 1898. Using the Quran and hadiths, which are over 1,400 years old, the jurists declared heroin to be haram, even though there were no direct mentions of this drug in the Quran and hadiths. The lack of direct mention proved to be a non-problem for jurists. This is because any recreational substance that takes away the senses is haram – irrespective of what it is called, which era it is used in, or what form it comes in. Where the underlying situation (loss of sense temporarily) is the same, the haram ruling is always the same.
The stock market, however, presented a new problem to the jurists. The stock market is unlike anything that occurred in the past – it’s totally novel and there are no parallels. In the absence of a direct comparison, scholars were forced to deeply study this relatively new phenomenon and try to extrapolate rules that would guide Muslims in their trading and investment efforts.
The outcome of all this studying is that a whole host of scholarly opinions came about. Some say trading on the stock market is totally haram. Others, meanwhile, say trading on the stock markets is halal…as long as certain conditions are adhered to. A lot of the difference comes down to how each 'Aalim has understood the stock market.
Indeed, some scholars have drawn parallels of companies limited by shares or limited by guarantee to that of Waqf and Baytul Maal- but neither are the equivalent of a stock market.
Let us work with what is established: buying shares gives a bundle of rights to the owner of the share.
But this type of ‘ownership’ is not conventional ownership; it does not give the owner of the share the right to possession. In contrast, if you bought a car and became its new owner, you have the right to possess it (take it home, keep it in your garage, etc.) and use it (drive it, sit in it, etc.). But buying shares in, say, Virgin Galactic, will not entitle you to sit in the shuttle and take pictures (which you could very well do in your new car).
Nonetheless, buying shares is still a form of ownership (albeit a novel one), and gives you sufficient rights to satisfy the requirements of ownership (malikiyyah). This may sound basic, but without ownership, selling would become impossible: Muslims are not allowed to sell something they do not own.
In short, buying shares is a novel type of ownership and is a valid form of investment according to the 'ulama who are experts in islamic finance.
Further reading:
1. https://www.investopedia.com/ask/answers/difference-between-shares-and-stocks/
2. https://ewf.companieshouse.gov.uk/help/en/stdwf/glossaryHelp.html#:~:text=they%20decide%20upon.-,Shareholder,all%20shareholder%27s%20names%20and%20addresses.
3. https://islamqa.info/en/answers/66227/ruling-on-taking-drugs-and-do-they-come-under-the-same-heading-as-khamr-intoxicants
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