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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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