Shari’ah Ruling Regarding Dealing in Stocks

Stocks are part of a company’s capital and the object of its profit or loss, according to the result of a company’s operations. A stock-holder is considered a partner in the company, owning part of its assets, proportionate to the number of shares he owns in the total company’s capital stock. He could sell his shares whenever he likes.

When first issued, stocks have a nominal value determined on the first day of issue. It also has a market value which depends on supply and demand in the stock market in which stocks circulate and change hands.

From a legal Islamic perspective (shari’ah), the legitimacy or illegitimacy of certain stocks depends on a company’s business activity.  Should the main purpose of the company be illegitimate, such as dealing in riba (usury), manufacturing or trading in alcohol; then participation in and purchase of such company’s stock is prohibited. The same holds true if the company deals in illegitimate forms of sale, such as, al-eina and al gharar.

Basically, Al-gharar is cheating, while Al-eina is one form of it is when a person agrees to purchase a commodity a higher price than the Market value and then sells the commodity back to the seller at a lower price, thereby becoming indebted to the seller for the difference (refer Subul-us-salam). Both of this activities is wrong according to shari’ah and should not be invested in.

Method of Paying Zakat on Stocks

The stockholder is not liable for payment of any zakat in respect of their stock IF the company pays such dues on their behalf under one of the four arrangements mentioned earlier. This is to avoid paying zakat twice.

If the company does not pay the zakat due, the stockholder should pay them as follows:

If their original intention at the time of purchasing their stock was to trade them in by buying and selling, then the stocks are subject to zakat at the rate of 2.5% of the market value of the stocks on the day zakat is due, as is the case with any article of trade. However, if his original intention was to benefit from their annual yield, then he should pay zakat as follows:

  1. If it is possible for the shareholder to know, through the company or any other means, the share of each stock they own in the assets requiring payment of zakat in the company, they should pay zakat in respect of that share at the rate 2.5%.
  2. If it is nor possible to know, they should add whatever yield they received from the stock to their other wealth subject to zakat. Counting their same haul and nisab. Then they should pay zakat due at the rate of 2.5%. By doing so, their zakat obligation will have been met.

And Allah Knows Best…

References:
Zakah According to the Quran & Sunnah: A Comprehensive Study of Zakah in Modern Perspective (2011), by Professor Muhammad Zulfiqar.

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