Rules of Shariah Compliant Equity Trading
Investing in Shariah compliant companies
The easiest way for Muslims to invest their money in a halal manner is by investing in Shariah compliant equities of companies listed on local stock exchanges.
Buying stocks of companies which are classified as Shariah compliant is permissible from an Islamic perspective. There is widespread consensus among Shariah scholars for the same. Hence, trading in Shariah compliant stocks is considered as a halal source of income.
What are Shariah compliant stocks?
Shariah scholars, over the past 3 decades, have framed certain rules to ascertain if a company is Shariah compliant. Such rules are called ‘Shariah Equity Screening Criteria’. If a listed company passes the Shariah equity screening criteria, it is called a ‘Shariah compliant company’. Investment in such companies is permissible and is considered halal. Earning by trading in such companies is considered a halal source of income.
What is Shariah Equity Screening Criteria?
The Shariah screening criteria sets out the rules of how to screen listed companies to find out if they are permissible for investment by Muslims. It has two levels.
i Business screening:
Companies that derive less than 5% of operating revenue (core or active business activity related) from the below non-permissible areas, pass the sector screening.
Non-permissible or prohibited activities are:
d. Interest based activities
g. Conventional entertainment
h. Trading of gold and silver on a differed basis.
ii. Financial ratio screening:
There are three financial ratios which a listed company has to clear to pass the financial ratio screening:
a. Interest bearing debt/36 month average Market Cap < 33%
b. Cash + short term investments/36 month average Market Cap < 33%
c. Accounts Receivables/36 month average Market Cap < 49%
If all three ratios are below the mentioned threshold, the company is said to have passed the financial ratio screening.
A company which passes both the levels of screening i.e. Business screening as well as Financial ratio screening, is said to be a SHARIAH COMPLIANT COMPANY. Investment in the common equity of such companies is permissible for Muslims. For detailed screening criteria, please see: Islamicly Shariah Screening Criteria
Islamicly provides the most up to date Shariah screened list of stocks for most major markets covering more than 30,000+ stocks globally. Upgrade to view all the Shariah compliant stocks in your market!
Dividend purification of Shariah compliant equities is the process of purifying the income earned from Shariah compliant equity investments to the extent it had impure income.
Companies having less than 5% of their revenues coming from prohibited business activities are said to have passed the Sector-based Screens. But the proportion of dividends attributed to revenue generated from such non-permissible business activities and interest income will have to be purified.
For more information on dividend purification, please read: How to Purify Dividends
Watch how to purify dividends on Islamicly:
What needs to be purified? Dividends or capital gains?
Dividend purification: Only the amount received by the investor from the company (invested company) in the form of dividend has to be purified. Here, ‘purified’/‘purification’ means, the amount needs to be donated to a charity of your choice.
The purification ratio for each Shariah compliant stock is provided on Islamicly.
Capital gain purification: Capital gains or trading gains i.e. profit from increase in value of your stocks, need not be purified. Your entire trading gain through investment in Shariah compliant stocks is halal income.
Walkthrough Video for World first Shariah Certified Portal.
Is Intra-day trading permissible?
Intra -day - Buy first and then sell:
If you buy a Shariah compliant stock first and then sell it, this is considered permissible If the buy and sell happens on the same day (intra-day), it is still permissible – the simple reason is if you have bought it, you are the full owner of the same. Hence you have the full right to sell it too, even if the buy and sell transaction happens the same day or even within minutes.
Intra-day - Sell first and then buy it back to settle the trade – Short selling:
Short selling trades are not-permissible as you have sold something which you have not bought/own i.e. sold something that you are not the rightful owner of.
Intra-day - Buy first and then sell – using leverage provided by your broker:
Interest free leverage:
If your broker is providing you interest free leverage, then it is permissible to do intra-day (Buy first and then sell) transactions in Shariah compliant stocks. Please do read the terms and conditions of your brokerage account to find out if the leverage provided is interest free or not.
Interest bearing leverage:
If you are trading in Shariah compliant stocks using interest based borrowed funds or broker provided leverage which is interest based, then such a trading activity is not permissible
Investment in non-compliant stocks
If a stock is non-compliant, investment in that stock/company is not-permissible. If you had previously invested in that stock, then you need to sell the same within 7 days. All gains (including dividends) received from this stock needs to be purified i.e. donated to a charity of your choice.
Investment in Shariah compliant stocks, which turned non-compliant now
If you invested in a stock when it was compliant, but it subsequently turns non-compliant (due to financial ratio failure or income from non-permissible activity has increased to more than 5%), then you have 90 days to sell that stock.
Any capital gains accrued to this stock from the day it turned non-compliant until the day it was finally sold out needs to be entirely purified. Dividends received during the first 30 days of the grace period will be purified as per the standard process. Any dividends received after the first 30 days of the grace period will be purified completely i.e. should be donated to charity of your choice.
Trading in Futures, Options, CFD of Shariah compliant stocks
Trading in Futures, Options, CFD is considered non-permissible. Hence you cannot trade in such products/strategies.
How can Islamicly help in maintaining Shariah compliant investments in stocks?
Islamicly is a retail app & web platform which enables Muslim consumers to get the most accurate & well researched real-time information on Shariah compliance of globally listed stocks, opening up the global equities market for Islamic retail investors. Islamicly app is the world’s 1st Shariah certified app for shariah compliant equities.
On Islamicly (App or Desktop) you can:
- Search and discover which stocks are Shariah compliant.
- More than 40% stocks on an average are Shariah compliant globally
- Add your choice of stocks in portfolio and update your holding data (price, number of shares etc.). This will help you monitor your growth.
- If a stock changes compliance, get alerted immediately through in-app notifications
- See detailed reports for each stock and reasons for its compliance.
- Check dividend purification for every compliant stock
- Check compliance history for every stock.
Do watch what one of the pioneering scholar of Islamic finance says about Islamicly here:
Few Words About Us!!
"I want to thank everyone who has worked and is working on it. I found such an app. Once I wrote something like "Halal stock app" on Google and downloaded Islamicly. Now it is easy for me to determine which stock is Sharia compliant or not with this app! Green is permitted, Red is haram, Purify dividends, Changes in compliance, and all other features what exactly I was looking for.
This is a great investment in the financial knowledge of the Ummah. Assalamualaikum and thank you for this App"
Mr. Abdul Rashid
lsamicly is a very good app and it helps me lot in my trading business and it is very helpful in finding or winning shariah compliant stocks which I am managing in quite, few numbers of stocks. It is very transparent and it provides us many information on the app and Inshallah and as I understood that you will offer us the web portal as well and I am pretty looking for it to wait so that I can have many things to be screened on the portal Inshallah. Thank you very much, Thank you for making the app for inshallah, Allah Subhanahu wa Talala bless you all Inshallah
Mr. Ahmad Sufi Hassan
"I am currently Active Trader for mainly US Stocks Market, so I like Islamicly because its features How they update App daily so easy for me to find stocks for Shariah Screening and they provide me clear information about How for me As not understanding about Shariah but I can understand How they screen the Shariah information in this App so I clearly know How about 5% purification and how to set the portfolio for me and this is helpful for me to find shariah stocks.
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