Understanding Stock Investing #
To identify whether a stock trading/investment or certain activity falls within the scope of “gambling”, one first needs to understand the elements of gambling that lead to the Shariah prohibition.
One of the major elements of gambling is the characteristic of a “zero-sum game”. It is a situation in which one person or group can win something only by causing another person or group to lose it. In other words, one can only win at the expense of the other(s), and a “win-win situation” is not a possible outcome. On the other hand, investment in the stock market is a kind of positive-sum game in which the shareholders may win together or lose together.
Investing in the stock market involves taking ownership of the assets. Consequently, the owner bears the risks associated therein (ownership risk). On the other hand, the winner in gambling does not assume any ownership risks as the winner does not assume ownership. Hence, gambling contributes to neither any socio-economic benefits nor real productive economic activities. In fact, gambling disrupts the socio-economic structure of a society.
The prohibition of gambling is also closely associated with the element of gharar (excessive uncertainty), unlike stock market trading when investors buy stocks at a certain fixed price while receiving a share of ownership in return. The market price is expected to fluctuate, but it may be projected based on the investors’ knowledge, skills, and efforts and not merely based on chance. In contrast, gamblers solely rely on luck and wishful outcomes of events to reap the benefits.
In conclusion, the prohibition of gambling is not due to the element of speculation in its absolute term. Speculation is neither inherently unlawful nor disliked in Shariah, as it is part and parcel of trade. A trader speculates on the values of goods that may seem to decrease or increase so that they may buy the goods at a low price and sell them at a higher price. This type of guessing and speculation is permissible in Shariah.
What is impermissible is that one violates certain Shariah injunctions and rulings when speculating. Such as selling goods that are not of one’s ownership, selling goods that are not in one’s physical or constructive possession, or engaging in gambling and other unlawful matters. Therefore, short sales, future sales and forward sales are impermissible for this very reason.
