Islamic Trading Particulars

“Playboy Enterprises, Inc (PLA)”, “British American Tobacco (BTI)”, “Nevada Gold & Casinos Inc (UWN)” and many other companies cannot be a subject of trading for Islamic investors. What’s wrong with this?

Unlike the usual trading in U.S or U.K., trading in the Islamic world or trading by “Shariah” (sacred law of Islam) has a lot of restrictions. The major difference between Western and Islamic financial markets is the prohibition on trading in risk.

First of all, it is impossible to have short positions in Islamic World. You need to borrow the stock from your brokerage and sell it after that. But according to Shariah standpoint, in case a vender wants to sell something, he must have it, at least. It is prohibited. Such operations involve tremendous risk without upper limit. Theoretically, it is possible to lose even more money than you have in account.

Secondly, margin trading. By dint of loaned money, the stocks may be bought together with margin and it becomes possible to pay interest to the brokerage. Moreover, it is even more risky operation as a short selling. So, it is prohibited as well.

“Options involve risk and do not meet the case for all investors…” – this phrase is a known quantity for options traders. It gives the answer to the question: Why derivatives, such as options and futures, also cannot be traded.

Day trading prohibition. It has nothing to do with the real investment. It resembles gambling, considering that you raise money on high-frequency price fluctuation.

But the designated reasons do not interpret the fact that you will not be able to invest your own money in 100 stocks of “PLA”. It is not very risky transaction, in fact. So why is it prohibited? The answer to the question is simple: when you purchase shares to a company, you become a shareholder, actually, and, as consequence, become a partner in the business.

There are some types of business which Muslims would not like to undertake. Here they are:

  • alcoholic beverages
  • pork and pork products
  • tobacco products
  • gambling and lottery
  • pornography and adult oriented material
  • prostitution and drugs

That is why Muslims can not invest in “PLA”, that will be a co-owner of the pornography business.  The same is true for BTI (tobacco industry) and UWN (gambling industry) companies.