Stock Market in Shari’a Perspective

Introduction

Stock market is a market in which stock trading takes place. In regards to harvest crop, it also involves brokers who serve as the intermediary between sellers and buyers.

Upon Why Is it Called “Stock Market”?

Some said that it is called stock market for it is traced back to a hotel in Belgium where the conglomerates and the brokers gathered to work. Or, it is traced back to a Belgium man named Deer Bursiah, who had a palace where the conglomerates and the brokers came together for a common purpose.

The aim of the stock market is to create a simultaneous and continuous market, where demand and supply as well as people who are willing to sign trading agreement meet. These activities in turn will bring various benefits that I will expose later.

However, in the other hand, this market also contains many evil aspects, such as wrongdoing and criminality such as gambling, devouring other’s money illegally, monopoly in trading, profiting from illegal source, manipulating/speculating with other people’s and public money. Therefore, because of this market, many of wealth and economic potentials were destroyed and devastated in a blink of an eye, similar to the destruction caused by an earthquake or other natural disaster.

The Transactions in Stock Market

Firstly, From Its Time Frame

Instant transaction. I.e., the two parties involved in transaction hand over the traded goods directly, or at least in 2×24 hours.
Futures transaction. I.e., transaction that is decided after some times, which has been appointed and agreed at the time of transaction. Sometimes, it has to be re-clarified in the days that has been confirmed by the stock committee, and the handing over is decided upfront.

The Negative Effects of Stock Market

The negative effects of the existence of stock market can be seen in several points below:

Most of the futures transaction in stock market aren’t the real transaction, because there are no element of exchanging goods between the transacting parties in the market, whereas the stipulation of trading is that there is an exchange of goods in items that required to be handed over with payment, or one of them.
Most of the sellers in this market are selling things that do not belong to them, of currency, stock, current credit, or commercial commodity, with the hope that it will be sold in the actual market and the handing over will be accomplished later, without collecting the payment in advance such as in the stipulation of As-Salam trading.
The buyer in this market mostly buy and resell the goods that he has bought before receiving the goods itself. This second-hand buyer also resell it before receiving the goods he had bought. Likewise, this kind of transaction happens repeatedly over one commodity before it is being handed over; hence, the transaction will end at the hand of the last buyer, who might intend to buy it directly from the first hand seller who has sold goods that doesn’t belong to him yet, or at least, Or at least who doesn’t set the price according to the date of transaction, i.e., the day of closing for price. The seller and the buyer other than the first and the last only trade for gaining more profit, if they do get it, and let the goods go once it doesn’t bring them profit anymore at that time; a practice that is similar to gambling.

Any Company or individual with large sum of capital monopolizes stock and the like, as well as other commercial commodities in the market in order to put pressure on the sellers who do not own the goods that they sell yet, hoping to buy the goods at the cheaper price, or to do direct handover, thus causing difficulty for other sellers.
In essence, the danger of stock market roots back from the appointment of this market as a major influencer for markets in a large scale. It is because the prices in this market aren’t solely rely on pure market mechanism from supply and demand; instead, they are influenced by many factors, for example, an influence from market analysts, from monopoly in traded goods and stock number, or from the spreading of false news and the like. This is where a grave danger is hidden, according to sharia perspective. Those factors create natural instability of prices, which in turn, negatively affects the current economy in a large scale.

For example, and not to mention it as a whole: some of the large investors deliberately dump some stocks and current accounts (giro), thus the prices will fall due to the overwhelming number of supply. In the end, the smaller investors immediately resell their stock cheaply, fearing that the price will plummet further thus they could suffer more profound losses. Because of their offer, The stock price will continue to go down, hence the large investors can buy back stock with a cheaper price, hoping for raising the price with the number of demand. In the end, the large inverstors are the one who is benefited, whereas the small-scaled investors suffer from great losses as a result of the large investors’ act in pretending to throw away the stocks. And this kind of trick also occurs in the commercial commodities market.

Therefore, the existence of stock market has created pros and cons among the economy experts. It is because at one time in economic world, this market has a potential to wipe out a massive number of capital in a blink of an eye. On the other hand, this market can boost the number of new rich men, without having to sweat much. Furthermore, during heavy economical crisis that swallow the world, many of the experts in economy demand for the government to close this stock market, since it can burn out numbers of capital, push the economic growth towards the abyss in a very short time, not unlike the destruction caused by natural disaster and earthquake.

The Positive Effects of Stock Market

Aside from its negative effects, the stock market also bring positive effects, namely:

Stock market opens a fix market that facilitate buyers and sellers to meet and transact, whether it is instant or futures transaction over stock, current account, or commodities.
It facilitates the funding of factories, governmental trading and project, through the selling of stock and commercial current account papers.
It also facilitates stock selling and current account credit to other parties, and for them to use its value, since the company issuing the stocks do not specifically set a fix price for the shareholders.
It facilitates the evaluation of weight for the stock prices and current account credit, as well as other commodities; i.e., the twist and turn regarding those items in business world through the supply and demand activities.

Both instant and futures transactions sometimes use valuable papers/documents, and sometimes use traded goods.

The definition of instant transaction is a real handing over of goods, not an imaginary or item-less transaction; in other word, it can be defined as containing a real handing over of goods.

Whereas in general, futures transaction is a kind of investment in various prices without any intention to proceed to real transaction; in short, this kind of transaction that focuses on the rise and fall of the prices of the item.

Moreover, there is a kind of futures transaction that serve permanently for the parties involved in it. The other kind gives several options of choice according to the form of transaction. It is different from other transactions, in a sense that people who obtain that right to choose shall pay for compensation if they ever use the right.

The application of investment in stock market adds a different definition for the investment system itself, unlike the one that is widely known in Islamic law.

In Islam, investment collaboration means handing over a sum of capital to any party that wishes to trade, and in return will receive certain part of its profit. This kind of transaction brings forth the completion of mutual cooperation between capital owner who doesn’t have the skills needed for business, with people who have the skills but are lacking of capital.

Investment collaboration in stock market works by using trading over prediction/forecast, i.e., prediction of market price activity, in order to obtain higher profit.

Secondly: From Objective POV

From objective point of view, stock market transaction is categorized into two:

Transaction using concrete commodities (commodity stock)
Transaction using valuable paper (Stock market)

In commodity market that trades crops and natural harvest, the said commodity are not present at the market. The exchange is performed using sample or based on name of one of the agreed commodity, and the handing over will be carried out later.

Whereas in stock market, the objects are stock and current account. Most of the transaction are carried out using the stock papers.

The definition of current account in this context is a cheque that contains an agreement between the issuing parties, i.e., the bank or company, that can be exchanged by the one carrying it with a certain sum of money in a certain date, with a fix interest warranty; however, it has nothing to do with the ups and downs of the market price.

Whereas The definition of stock is a singular sum of collective capital with similar amount each, which can be operated through various ways of trading, and its price can change at times depending on the profit and loss or the performance of the company.

Sharia Laws Regarding Stock Market Transaction

It has been explained beforehand that stock market transaction consist of instant, fix, and permanent transaction, and futures transaction with the stipulation of payment in advance. From objective point of view, the transaction is of regular commodity, as well as stock and giro transaction.

Since the transactions are varied, with this basis, it is impossible to establish a general ruling of sharia law; each transaction should be detailed first before its separate ruling can be established.

The Institution of Islamic Law Research which follows the Rabithah al-alam al-Islami has detailed and established the ruling of each transaction in the seventh meeting that was held in 1404H in Mecca, al-Mukarramah. Regarding this matter, the council has issue the following verdict:

First, The main target of the stock market is to create a permanent and simultaneous market in which the market mechanism that occurs, as well as and seller and buyer can meet and trade. It is a good and beneficial thing, and it can prevent the businessman to take advantage of the naive or the unaware buyer who wish to trade but isn’t knowledgeable of the real price of the item, or even isn’t knowledgeable of anyone who are willing to buy or sell things to them.

However, this evident benefit in the world of the stock market is shrouded by various dangerous and unlawful transaction in sharia, such as gambling, taking advantage of other people’s lack of knowledge, or devouring other’s wealth illegally. Therefore, it is not possible to establish a general ruling for the stock market in its grand scale. The solution is to detail all kind of transactions in the stock market, one by one, separately.

Second, Instant transaction in regards to items that are under the possession of the seller that can be handed over with the requirement that the handing over is carried out directly at the time of transaction, is allowed in sharia, as long as the transaction is not for items that are prohibited in sharia. However, if the items are not in the possession of the seller, the transaction should be switched into As -Salam transaction, by fulfilling its requirements. Only after that that the seller is allowed to sell the item even though he hasn’t received it.

Third, Instant transaction of company and firm stocks; if the stocks are indeed under the possession of the seller, it is allowed in sharia, as long as the company’s or the firm’s business are not forbidden in sharia, such as usurious bank, liquor company, and the likes. If the businesess are forbidden, the stock transaction also becomes forbidden.

Fourth, Instant and futures transactions in regards to obligation with interest, with its all forms, are not allowed in sharia, because they are trading activities that are based on usury, which is forbidden.

Fifth, Futures transaction with all of its forms in regards to the vague item, i.e., the stocks and commodities that are not in the possession of the seller, according to the market system is not allowed by sharia, because it includes in selling the items that are owned, with the reason that the seller will only buy and hand it over at the day of the transaction. It is not allowed in sharia based on a valid hadith from the Messenger of Allaah -peace and prayer of Allaah be upon him-, in which he said, “Do not sell what you don’t own,”. It is similar to a valid hadith narrated by Ahmad and Abu Daud, from Zayd Ibn Tsabit -may Allaah be pleased with him-, that explained that the Prophet prohibited them to sell items where it is bought, until the buyer carry it to their respective places (home, stores, etc -ed).

Sixth, Futures transaction in stock market scope is not similar to As Salam transaction which is allowed in islam, since the two transactions differ in two aspects:

a). In stock market, the price of the commodity or stock is not directly paid at the time of transaction. Rather, it is postponed until the closing of the market. Whereas in As-Salam transaction, the price of the commodity should be paid in advance at the time of transaction.

b). In stock market, the traded commodity is being sold several times while at the hand of the first seller. The goal is simply to hold onto the goods, or to sell it at a highest price to the buyer and other seller but not in a real scheme, it is only to speculatively viewing the profit and loss of the goods. It is similar to gambling. Whereas in As-Salam transaction, it is not allowed to sell the goods before it receiving it.

Based on the previous explanation, Islamic Law Research Foundation considers that the governments of the Islamic countries are obliged to restrain the stock markets from doing their activities according its wish, i.e., by carrying out various trade and transaction in their countries, of the lawful and the unlawful. They should not give any opportunity for the parties that manipulate prices to commit their crimes, thus leading the country to its financial demise and economical destruction in general, which eventually will cast calamity upon majority of their citizens. Indeed, the true goodness is by holding firm to the Islamic teaching in every aspect of life. Allaah declared,

“(x) This is My Way – that which is Straight; follow it, then, and do not follow other paths lest they scatter you from His Path. This is what He has enjoined upon you, so that you may beware.” (Al-An’aam/The Cattle: 153) Allaah is The Saviour, Who grants us His guidance, Who guides us to the straight path. Peace and prayer of Allaah be upon His Messenger, Muhammad.