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The underlying ruling is that trading in stocks is permissible, as with other permissible trades, as long as certain conditions are met. See the answer of Sh. Salah as-Sawy, President of AMJA Fiqh Council:
” In the name of Allaah, the Benevolent, the Merciful. All praise is due to Allaah, and peace and blessings be upon the Messenger of Allaah, his family, companions, and those loyal to him. To proceed:
Trading in stocks (i.e. selling, buying, investing or speculating) is a permissible matter, as all other permissible trades. Indeed, the Most High said: “Allaah has permitted trading and forbidden Ribaa (usury)”. However, the permissibility of trading in the stock market is stipulated upon certain conditions, of which we will mention the most important, as follows:
· To avoid investing in impermissible shares; these are companies in whose main activities are in unlawful industries, such as usury, wine-making, insurance, entertainment, gambling, and others; that which the Shariah prohibited from dealing in it, profiting from it, or benefiting from its value.
· That the investment contract is free from all nullifying factors, such as ambiguity, impermissible monopolization, or any cheating thereof.
As for companies that trade in permissible commodities, but deal with interest [riba], whether in lending or borrowing, then it is upon whoever deals with it to take out from the profits he receives an amount proportional to the interest, so as to purify the rest [of the money]. And it is essential that he exerts all efforts to choose the companies which don’t deal with banks in such interest-based transactions if they are available.
As for the outstanding stock options in global markets, whether they are called options or put options, then they are from the ambiguous contracts forbidden by Shariah. And the Islamic Fiqh Assembly published a decision upon that in Jeddah, the year 1992, number 63. And this is because it doesn’t allow for the profit of both parties, but the profit of one is a definite loss for the other, no doubt. Therefore, these options are venture tools for prices. These are among the contracts which made the French Economist, Maurice Allais, describe the global stock markets as “huge actual casinos”, and this is because the nature of gambling is for one party to profit at the expense of the other, and this is exactly what happens in the stock option contracts in the global markets. May Allaah increase you in cautiousness and success, and may He protect us and you from the temptations, what is apparent and what is hidden thereof. And Allaah, the Most High, knows best.”
In addition: we remind one considering this trade, that they will owe Zakat on these assets. See e.g. the book Simple Zakat Guide, by Imam Joe Bradford for calculation worksheets.
Further: in evaluating a stock, even an underlying permissible industry may not be Shariah-compliant if it holds too much in interest-based instruments. There are multiple approaches to this evaluation: one is by the standards organization AAOIFI (2015) suggests that cash placed in interest-based instruments should not exceed 30% of the market capitalization of the total equity of a company. And the interest-bearing debt of a company should not exceed 30% of the market capitalization of the company.
Finally: there are mutual funds available in the United States that can be further evaluated that are on a Shariah-compliant approach, such as Amana Funds or Azzad Funds or others.
