Guiding principles & tools of the shariah-compliant stocks trade

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Funding Souq Editorial Team
Tech Writer
Jun 04, 2024
Funding Souq’s editorial team comprises experienced finance and investment professionals that are on a mission to fuel SME growth, create jobs, and drive the economy forward. They aim to share their extensive experience and industry know-how to empower entrepreneurs and investors alike.
Jun 04, 2024
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Shariah-compliant investing is seeing an increased demand over the past few decades. Over the past 10 years alone, the global Islamic funds market has grown by more than 300% reaching nearly USD 200 billion in assets under management,

according to a report from the General Council for Islamic Banks and Financial Institutions. The global market for shariah-compliant paper is expected to reach USD 7.7 trillion by 2025, more than doubling from the USD 3.2 trillion invested back in 2015. And while much has been said and done when it comes to shariah-compliant debt instruments, investing in halal stocks has also seen growth in demand.

 

In a previous entry, we explored the rules behind screening for halal stocks to invest in, and the steps taken to purify a stock investment to ensure it is shariah-compliant. Investing in stocks is much more than making stock picks. It involves a variety of strategies and tools to better play the market and hedge against downturns. Today, we breakdown some of these tools and guiding principles when engaging in shariah-compliant equities trading.


Check our previous entry about Screening Halal Stocks & how to purify them

Always seek value

 

Buying a stock in the hopes that its value will rise and gaining on the sale of said stock when it rises (going long) is really the only way to make a return on an equity investment. The alternative – shorting-selling – is widely considered haram, according to Humayon Dar, the director general of the Cambridge Institute of Islamic Finance and former CEO of BMB Islamic, a Shariah advisory firm.


Short-selling is a strategy by which an investor makes money off the value of a stock falling. It involves obtaining a stock on margin – or borrowing shares and paying interest. The stock is then sold, and if it’s price declines, the investor buys back the stock at the lower price, then returns it to the lender, while pocketing the difference.

 

In addition to involving the use of margin trading, which involves borrowing and interest (the latter of which is explicitly forbidden in Islam), many regard shorting a stock as a highly speculative endeavor, which would make it “Gharar,” and thus forbidden in Islam



Read more about: Why many common securities trading strategies are considered haram?

Being mindful of the portfolio

Another key principle a halal-minded trader must keep in mind is that markets are dynamic and changing. A stock that was once halal, may not always be so. While a business changing its activities is unlikely to happen frequently (although that is certainly a possibility) financial ratios discussed in our previous entry could easily change.


As such, it is incumbent on a shariah-compliant equity investor to pay attention to updates on their portfolio, including quarterly earnings releases and annual report and other key investor relations materials.

 

Indices and trackers will save you time

 

As we noted in the previous entry, finding stocks that are considered halal by both activity and that meet the required financial ratios can be a cumbersome process. Furthermore, as noted above, keeping track of a stock to see if they remain halal is an even more tiring process and takes up time that should be spent making new trades or deciding on what to do with existing ones.

 

It is then perhaps not surprising that many of the global indexes out there have Halal offerings.


These include: The S&Ps Shariah Indices, which include some 31 different indexes that track stocks that are considered halal. These run the gamut of indexes tracking stocks in regional and global exchanges (including the Dow Jones and Nasdaq), large cap, midcap and small cap companies, as well as stock picks that track dividend payments and indices that track sukuk.


The S&P uses Ratings Intelligence Partners – a London and Kuwait-based market intelligence and consulting firm that specializes in the Islamic finance market – to screen stocks for shariah-compliance.

 

Others include the MSCI Islamic Indexes, which excludes non-Sharia-compliant securities.” he MSCI Islamic Index Series uses Total Assets as the denominator while the MSCI Islamic M-Series Index uses Average Market Capitalization as the denominator.

 

The Islamic Index Methodology has been approved by MSCI’s Sharia advisors’ committee of Sharia scholars, as Sharia compliant,” the firm says. 

In addition to these global indexes, a number of halal stock trackers for listed companies have proliferated  to simplify the process to the average retail investor. These include apps like Zoya, and Mussafa.



Discalmer:
Funding Souq Limited (DIFC) is regulated by DFSA. Funding Souq operates an Islamic Window. This content is not reviewed by the Firm's Shariah Supervisory Board, it is for educational purposes only, and the Firm does not directly or indirectly provide these services.

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