Ethica Institute of Islamic Finance™

Are stocks and shares permissible in Shariah?

Stocks (or shares) are securities that represent an equity stake in a company and are a claim against the company’s earnings and assets; stocks are lawful provided all of the following conditions are present:

1) the primary business of the company is lawful;

2) if the company earns a lesser portion of its income from interest earnings, the shareholder is obligated to voice (by letter, phone or in person at the annual shareholder’s meeting) his disapproval of the interest dealings (thereby discharging his responsibility to condemn the unlawful in a business partnership);

3) when dividends are distributed or when money is earned on capital gains (the positive difference between the stock’s selling price and purchase price), the shareholder should remove the unlawful portion of the earnings from his wealth by giving to charity (with the intention of removing unlawful wealth, not with the intention of earning reward) an amount proportionate to the amount earned in interest (the proportion of earnings from interest income is found by dividing “interest income” by “total income”, both of which are found in the annual report’s income statement);

4) the company owns some non-liquid assets (e.g. property, plant, equipment); if the company owns only liquid assets (e.g. cash, marketable securities, accounts receivable, etc.) or if the non-liquid assets are of a negligible amount, the shareholder incurs riba whenever the market value of the stock is not identical to its face value because money, not tangible assets, is traded for unequal amounts of money.

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