Ethica Institute of Islamic Finance™

Conventional trading on the stock exchange is not based on Islamic principles of sale and transfer of possession. Among the prerequisites of a valid sale are the existence of the (i) buyer and seller, (ii) a mutually agreed price, (iii) payment of price, and (iv) transfer of goods to the buyer. However, transactions take place in the stock market every second without actual payment or delivery. (1) How can we consider some stocks on it permissible to trade in while others are impermissible? (2) Similarly, isn’t commodity trade impermissible as well where, for instance, possession of commodities such as gold and silver does not transfer either?

(1) The four conditions mentioned for a valid stock market transaction are correct and among the conditions that apply. However, it is not correct to state that because transactions are happening every second without actual delivery that they are impermissible thereby. If the sale is at spot, it is not a condition that delivery be immediate for many stocks because the concept of constructive possession applies in such cases, where the rights and responsibility are handed over even if delivery of the actual asset is not immediate. To use a common example, there are many large ticket items that we purchase at spot but do not take delivery immediately such as furniture, property, automobiles, and so on. You can read more about the concept of constructive possession in AAOIFI’s Shariah Standards, Mufti Taqi Usmani’s Introduction to Islamic Finance, and elsewhere. (2) Exchange traded stocks, where what is traded is the "price" of an exchange, are not permissible because, among other reasons, no asset or service is trading hands.

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