When you open a trading platform account, you’ll be able to trade different assets (something of monetary value). This article looks at some assets that can be traded using a trading platform.
To be clear, this does not mean MuslimShareTrader is recommending any particular asset. In fact, some of these are outright haram, so this article is for information purposes only.
1. Shares (equities)
The main, and the most established, asset you can trade on stock markets are shares. There are over 75,000 companies globally that are listed on a stock exchange that you can buy shares in. Unfortunately, the majority of those companies are haram to invest in, but if you do your research, there are enough halal ones out there.
The simplest way to understand shares is to view it as a slice of ownership in a company.
The legal and religious definitions may differ slightly, but for the intent and purpose of this article, let us stick to this definition.
Shares may be purchased to hold on to for the short term or the long term. People can make money on shares via dividend payments of selling the shares in the future for more than the cost price.
Shares have been covered extensively in other articles so this section is being kept short intentionally.
2. ETFs (exchange traded funds)
An exchange traded fund (ETF) is a basket full of securities that trade on the stock market. A ‘security’ is a tradable financial instruments that has monetary value (such as shares or bonds). An ETF is called an exchange traded fund since it's a fund (money that is pooled together) and traded on an exchange (just like stocks).
An ETF may pool together investors’ funds and invest it into various companies. Typically, an ETF would track an index (such as the FTSE 100), however, there can be different types of ETFs.
There are similarities between ETFs and stocks. For example, the price of an ETF’s shares will change throughout the trading day as the shares in an ETF are bought and sold on the market – just like buying shares in a company. Due to this, they are very liquid. Each ETF follows a certain market strategy or index, such as the FTSE 100 or a dividend strategy.
Suppose an ETF tracks the FTSE 100 index, it will own shares in every company in the FTSE 100. This makes the ETF inherently diversified in terms of companies, industries and markets (because the FTSE 100 contains 100 different companies, involved in various industries, operating in domestic and international markets).
Already, you should start to see that ETFs are likely to attract very cautious investors that want to see a return from their money, but don’t like risk.
ETF investors may be worried about inflation, which runs at around 2.5% a year. The FTSE 100 has returned around 7.5% on average since its inception many decades ago. It has stood the test of time and has provided reliable returns. This means potential investors could make around 5% returns a year even after taking into consideration inflation. Arguably, the only thing safer would be a savings account. Obviously, receiving interest is haram, but even if it were to be halal (for the sake of argument), very few banks actually pay such a high interest rates (and if any bank does, it requires you to lock up your money for long periods of time).
So, an ETF is kind of a middle-ground between a savings account and regular stocks- likely to provide high-ish reliable returns, but highly liquid.
I personally do not get involved with ETFs because the fund manager could (and probably would) invest some of the funds into outright haram businesses (such as gambling, tobacco or conventional finance companies). Given that most companies in the stock markets around the world have a totally haram offering, and many more are not halal to invest in due to financing issues, the average ETF seems very questionable. In addition, getting 5% return a year from an ETF is too low a return for me. Simply put, it would not make a material difference to my life.
3. Bonds
Sometimes a large company or a government may wish to borrow money. If it borrows money from a bank, this is called a loan. If it borrows money from non-bank sources (such as ordinary people or institutional investors), it’s called a bond.
In simple terms, the issuer of the bond (the organisation borrowing money) will pay interest to the buyer of the bond at a pre-determined interest rate at a pre-determined time in the future (maturity).
But why would anyone want to buy bonds?
Although this makes no sense to me personally, some people may be interested in bonds for the following reasons:
Bond issuers may pay interest rates that is likely to be higher than banks
An investor may be overexposed to equities (or any other asset class) so may want to balance their portfolio with a different kind of investment
An investor may have planned a big purchase in the future (such as land purchase or a large building development) and needs money to be available at a pre-determined time in the future; stocks may not be suitable because the value may go down
Whatever the reason, Muslims should know bonds are totally haram because it involves interest.
4. Cryptoassets
You’ve probably heard of Bitcoin. If not, it’s a type of digital currency. It is not the only one out there; others include Etherum, Litecoin (and more continue to emerge). These digital currencies are collectively known as cryptoassets.
Cryptoassets are incredibly volatile and can often change price by 10% or more in single day. In early 2021, the price of one Bitcoin reached a staggering $33,000.
Investing in cryptoassets may or may not be halal depending on how the transaction is structured. Considering it’s a relatively new type of ‘asset’, very few scholars have a working understanding of cryptoassets. If you decide to invest in this area, you will need to dedicate a lot of time studying it. Certainly, you should seek out the few scholars that do understand this area.
5. Property (via REITs)
And now we come to the investment type preferred of our parents, uncles and grandparents: property.
On the stock market, it’s possible to invest in a ‘REIT’, which stands for Real Estate Investment Trust. A REIT pools together investors' money to buy commercial property with the money. The obvious property type would be an office block and less obvious property would include super-sized warehouse facilities.
Unlike some stocks, REITs are not very volatile and therefore is attractive to cautious investors; REITs tie in customers to long-term lease deals and therefore have a steady and predictable revenue stream
As a business offering, property itself is halal. However, if the REIT takes out a conventional loan to finance land and property purchases, then it could be haram to invest in. This is something that your research should reveal.
6. Commodities
A commodity is a naturally occurring resource that can be traded (such as metals, oils, food and much, much more).
There are so many factors to consider with commodities that it should not be something you merely dabble in. Commodity prices can be affected by supply and demand, climate change, political events (such as the US-China trade war, Brexit, etc.), energy prices, transportation prices, new technology and many other factors.
Commodities often work on a ‘futures’ contract system. This is so incredibly complicated that it’s not suitable content for MuslimShareTrader.com given this site is aimed at the beginner investor. However, I will say that futures contracts are based on a transaction set in the future. It also relies on a high amount of leverage (which almost always relies on interest-bearing loans) and also involves a high degree of uncertainty. The combination of these things makes it very unlikely to be halal to get involved with in the Western market. Perhaps in the Islamic world it is possible to get involved in commodity trading.
7. Gold
On some platforms, such as eToro, you may see the option to buy gold. When you see this, the first thing you need to do is contain your excitement because it’s actually not possible to buy gold through eToro.
Some investors ‘buy gold’ through their trading platform without realising they are not buying the underlying asset – that the gold will not be registered in their name. Quite often, such investors are engaging in CFDs (which is totally haram) without even realising.
I have not come across a trading platform that allows investors to buy physical gold and own the underlying asset. This may be possible in the future. You should read the small print carefully. For now, investors can look into gold miners.
8. Currencies
You may have seen adverts on YouTube encouraging people to learn how to trade ‘Forex’ (a shortened version of the term foreign currency exchange). These adverts often claim that making money from Forex is easy, does not require knowledge or even much skill. Further, these adverts claim it only requires an hour or two of work per day. These adverts are potentially very dangerous, so I’m affording this section more importance to help beginners get a better understanding of what Forex is.
Forex basically means people are trading currencies.
You may be surprised to learn that Forex is actually the largest trading market in the world with daily trade volumes exceeding $5 trillion, according to the Bank of International Settlements (a bank for national governments). And it gets more interesting: the Forex market is open 24 hours a day, 5.5. days per week. This means a British Forex trader could theoretically trade for 132 hours compared to a meagre 40 hours per week, which is what a stock market trader could muster on the British stock market.
Whereas the stock market is highly regulated (many checks and balances are in place), the Forex markets are largely unregulated. For example, before a company can offer its shares for sale on the stock market, it has to be approved by the financial authorities, stock brokers tend to be regulated and so on. In fact, if a stock broker goes bust whilst still holding client funds, the UK government will compensate investors to the tune of £85,000 – the same level of protection as bank account holders. Nothing like this exists, or is required, in the Forex market.
With Forex, there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange.
Banks conduct most of the trading in the Forex markets on behalf of their clients. Let us consider an example here. Suppose a Bangladeshi transport company owned container ships (which consume colossal amounts of fuel). A fleet of container ships would consume millions of tonnes (large quantities of fuel is measured in tonnes, not litres) of fuel over time, which may cost billions of dollars (international trade is measured in dollars). Given that fuel would need to be bought from a foreign country, possibly Saudi Arabia, the transport company would need to exchange the Bangladeshi Taka for the Saudi Riyal (because the Saudis won’t accept payment in Taka). The shipping company may want to ‘lock’ in the currency rate for two reasons: first, maybe it thinks the value of the Riyal may rise in the future (thus making buying oil more expensive), and second, because it may dislike uncertainty caused by fluctuating currencies. The shipping company could get a bank to lock in the currency rate. Obviously, such a transaction would be so a large that only a big financial institution would need to conduct the deal.
Still, there are also speculative opportunities for trading one currency against another for professional and individual investors.
Trading currency always work in pairs. This means one currency is traded for another. For example, you may hand over £1 but receive $1.10 for your one pound. Let’s look at it another way. If a trader observes the current value of the dollar at $1.10 but believes in the near future the value will go to $1.30 (perhaps due to geo-political reasons), the trader could purchase lots of dollars, then wait for the price of the dollar to go up and then sell the dollars at the new, higher price. Luckily for the trader, he or she may not have to wait long because tiny fluctuations in exchange rates occur every day. They could simply cash in at any point of the day when the exchange rates work in their favour and make a profit.
But wouldn’t tiny price rises result in tiny profits? Yes, so there are two ways around this. The first is to put hundreds of thousands of pounds into each trade (which is not always possible). The other is to use leverage, which enables traders to use money that belongs someone else and almost always involves interest.
Around 80% of Forex traders lose money. There’s a reason why swathes of Forex traders are looking to sell courses online instead of actively trading on the Forex markets. Next time you see a YouTube advert promoting a Forex trading course, ask yourself this: If Forex is so profitable, shouldn’t this guy be trading forex rather than doing a free webinar?
Owing to the complicated nature of typical Forex trades, the leverage that is often required, Forex is considered haram by many. I would stay away from it.
Whichever asset you decide to invest in, I hope you do your research on it. The difference between halal and haram is not always obvious. If you're looking to start investing but feel you need a bit more guidance, consider joining my free 30 Day Trading Programme where you'll learn how to trade from the comfort of your own home.
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