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Halaal Trading or Shariah-Compliant Trading

Before we understand what is Halaal Trading in Stock Markets, let us understand the basic concept of Stock Markets & Equity Trading.


What is Equity/Shares/Stocks Trading?

Equity/Shares/Stocks are units of ownership in a company that provide for an equal distribution in its profits when declared, in the form of dividends. A shareholder is any person, company or other institution that owns at least one share of a company’s stock. Because shareholders are a company's owners, they reap the benefits of the company's successes in the form of increased stock valuation. If the company does poorly, however, shareholders can lose money if the price of its stock declines. The share price of any stock can be influenced by its performance in the company's business growth profits or losses, the activities and announcements that involve the company, as well as changes in an industry. Due to the fluctuations of the share prices of the companies, traders can invest their money to buy such shares at a lower price and sell them at a higher price and earn profits.


What is Halal Equity/Shares/Stock Trading?

Not all shares listed in the Stock Exchanges are Halal to trade. Islamic principles govern many aspects of a Muslim’s life, from social to economic matters. All of which are outlined in the Shariah Law derived from The Qur'aan & The Sunnah. The scholars have outlined the following  major filters to identify shares that would be Halal to trade, based on their Products & Business Practices, hence Shariah Compliant.

1 - Nature Of Company's Business: Companies whose Business is solely or major part of it is involved in Haraam products like Riba (Interest), Gambling, Alcohol, Pork, Tobacco, nudity, etc. which are considered Social Evils and also Forbidden in the Shariah, are excluded.

2 - Debt Ratio: Companies taking Interest-based loans of more than 33% of their Total Market Cap are also excluded.

3 - Profit Ratio: Companies who earn more than 5% of their Total Net Profits from Non-Halal Businesses or  investments are also excluded.

4 - Receivables Ratio: Companies having Account Receivables of more than 49% of their Total Market Cap are also excluded.

The remainder of Stocks after these screenings are considered Halaal Stocks to trade in and hence included in the Shariah Index.


What is Shariah Index?

Shariah Index is a list of companies in a particular Stock Exchange which are screened according to the above mentioned criteria and deemed Shariah-Compliant or Halal to Trade. The criteria used by any Index is mentioned in their documentations, and may slightly differ from what has been mentioned above. This list is continuously checked & re-checked quarterly & companies are either added or removed if they comply or fail to comply to the Shariah norms.


Do We Have Shariah Index In India?

Both the Indian Exchanges viz. National Stock Exchange (NSE) & Bombay Stock Exchange (BSE) have launched various Shariah Indices to help Muslim Traders & Investors choose relevant stocks best suited to their belief. Following are the current Indices listed on NSE & BSE Stock Exchanges, click on each to read more about the Index, Factsheet & Screening Methodology.

Nifty 25 Shariah
Nifty 50 Shariah
Nifty 500 Shariah
S&P BSE 500 Shariah 


Dividend Purification:
Since Dividend is a profit shared by the company, hence any Dividend received from a Shariah Compliant Company, will have at least 5% of it from Non-Halaal sources. Hence, to purify the Dividend, investors must purge 5% of all dividends received from such Shariah Compliant Companies.
 

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