An important question which Muslim economists face in these times, is the status of the stock market exchange. Is trading on the stock exchange haram? Is it really gambling as some people say?
The stock exchange is a market place where shares are bought and sold. By buying the shares of a company, you, in fact, share in the business. Therefore, if there is nothing against Islam in the nature of the business, there is nothing wrong in being the shareholder of that business or in getting dividends on its shares. Similarly, if you sell the shares at any point in time, owing to some reason and thereby acquire capital gains, both the transaction and the profit are acceptable from an Islamic point of view.
There are however situations when activity in the stock exchange is clearly against good sense and the norms of ethics. There are certain transactions which are or can be detrimental to the interests of either party by causing damage or deception. Therefore, though the Shari’ah has not prohibited these transactions as such and though, in most cases, they can’t really be termed as gambling, they are clearly against the spirit of Islam, when they result in or are likely to result in damage or deception. That is why there is a principle of Islamic jurists, that any transaction which causes or might cause darar or gharar (damage or deception) to either party should be prohibited by law. Where the law of the land does not deal with such transactions, it is up to the individual to decide whether or not the transaction will or may cause damage or deception to the other party. In case he is certain of such damage or deception, he should certainly avoid undertaking the transaction. Even in the case where there is a sufficient probability of darar or gharar, it is best to avoid the transaction as a Muslim knows that he will be held accountable on the Day of Judgement if his actions deceive someone or cause him damage.
Furthermore, at macro level such transactions can be detrimental to the economy when trading moves beyond mere buying and selling, that is when the buyer and the seller do not remain a buyer and a seller but become a ‘bear’ or a ‘bull’.
Ideally, the market price of a share should be related to the performance of the company. But the speculators (euphemistically called investors) manipulate the prices by artificially stimulating the demand and the supply of shares. Forward contracts are made, and further contracts are derived (financial derivatives) on that basis. The result is that the whole market activity is based on speculation rather than being based on entrepreneurship. The share price of a company which is doing perfectly well suddenly falls and that of a company in trouble suddenly rises. A person earns millions and loses millions in a day in this game. Obviously, such fluctuations have a negative impact on the economy, which is usually borne by the not-so-affluent sections of the society. One of the worst cases of such speculation was when on Oct. 19, 1987 — now known as the Black Monday — Wall Street crashed owing to the panic that had spread among the investors. Billions are lost in a day in such crashes. Since shares are sometimes bought and sold even before they have been actually bought and sold and, quite frequently, are bought primarily on the basis of borrowed capital (as in the case of the famous Australian investor Alan Bond), stakes are high, and the slightest fear can start a chain reaction, which may result in a major catastrophe. The reason for such timorousness is nothing except that the whole economic activity in these exchanges is based on speculation and interest-based borrowing rather than on entrepreneurship and equity participation. When such a large area of economic activity is based on speculation and interest-based borrowing, the spirit of entrepreneurship suffers, and moral corruption pervades society.
Economic activity should be based on entrepreneurship, hard work, creativity, moral principles and concern for others, whereas speculation is often detrimental to these values. An individual should also keep in mind the effect of his personal decisions on the whole society, and as its responsible member and as a good Muslim try to be part of the solution instead of being part of the problem.
It has been seen that involvement in speculation often leads to greed and avarice, which come in the way of ethics and concern for society, whereas a Muslim prefers sticking to nobler values even if they afford him less material benefit. Even in the absence of specific Divine injunctions or enacted laws, a Muslim should ask his own self whether his involvement in such activities is leading him away from God and inclining him towards the violation of moral values and ethics. And this is a question which an individual must answer himself. The rule here is sal nafsak (ask your soul). A Muslim’s life should be marked by love of God, fear of His wrath, charity and concern for others. Losing these values for material benefit is a trade that a good Muslim never makes.