About a year or so ago, I was encouraged to read the highly popular personal finance book Rich Dad, Poor Dad and developed a sensational interest in stocks and investments in general. But there was just one problem. I knew nothing about the subject. How do they work? How do I buy and sell them? How do I know which ones to buy? What about the Islamic aspect? How can I know if they are halal or haram? What’s a mutual fund?
So this led me on a quest of many weeks to do an intense self-study on the stock market and try to figure it out. I took notes, which I’ve linked to in the guide below, read a book or two, watched videos, read numerous articles, and bookmarked a large collection of websites and articles discussing the subject of stocks and investments in general. I even looked into Islamic rulings on stocks and bookmarked various fatwas on the issue as well.
I am happy to say that after all of that I was able to understand the market at a basic level to be able to at least delve into the subject. I even bought and sold some individual stocks just for fun and practice. I am now confident enough to say that I have a better understanding of stocks and investments than I did before my quest. I’m no expert but I know enough to be able to weigh my options.
I’ve just recently realized that there are many other Muslims that are in the same boat that I was. They don’t understand how stocks work at all but are interested in the subject. They especially want to understand it from an Islamic perspective before delving into the craft. So I’ve decided to write a guide of sort and give resources and links to all the research that I did that helped me understand the stock market better. Below is my complete guide. I’ve left the Islamic part at the end because you need to understand how the market works before delving into the fatwas regarding it. Reading the fatwas without understanding how the market works first may confuse you. Just be patient and go through the whole guide and it will start to make sense after a while insha’Allah.
If anyone finds anything missing, please let us know in the comments section below. I’ve added newer stuff that I found while writing up this article.
Disclaimer – The links and resources below are what helped me personally understand the subject. I am not guaranteeing that it will do the same for you. I am only relaying this information to help my brothers and sisters who are in the same boat that I was in before. I am hoping that they will get enough out of it to at least be able to have a basic understanding of how investments, particularly stocks, work.
Bonds are exclusively interest based and should be avoided by Muslims. Just indicating that here because some of the videos below delve into it. There will be more on this in the fatwa section.
Online brokers to Buy and Sell Stocks
There are many different websites out there but following are among the more popular ones.
Robinhood – This is a popular free trading app. Usually, it costs around $10 to trade in stocks. But this app lets you do it completely for free. It’s quite popular among the younger and beginner level investors.
Motif Investing – This is another fee based stock trader. It has some unique aspects though. It allows investors to choose from over 100 pre-built portfolios of 20-30 stocks, to customize existing motifs, or to create a brand new, unique portfolio all for a low execution cost of $9.95. So in a way, it’s a customizable mutual fund that you can manage on your own. You can add or remove stocks as you wish from a motif or designate a particular percentage for each stock in your motif. So if you have a motif of 25 stocks, you can say ‘I want to invest $200 and distribute 4% to each stock.’ This way Motif will automatically invest $8 in each of your 25 stocks. You can also customize and choose how much more or less do you want to invest in each stock in your motif.
A stock screener is a tool that investors and traders can use to filter stocks based on user-defined metrics. Investors use screeners to find stocks that are poised to perform well over time. They allow investors and traders to analyze hundreds of stocks in a short period of time, making it possible to weed out those stocks that don’t meet the user’s requirements and focus on the instruments that are within the user-defined metrics. Stock screeners are offered on many websites and trading platforms. You can also use them to see a history of the stock you want to research or buy. You can see how the stock has done over the past few years. I personally have used the following only:
Finviz – This is a popular screener among traders and is very detailed. It even provides financial information on stock companies. If you want to do thorough research, then this is one of the places to go.
Yahoo Finance – Yahoo allows you links to the financial information of the company as well to view their income statement, balance sheet, and cash flow but, unfortunately, doesn’t have that information always available for every stock.
Useful Websites to Follow
I recommend following the below websites to keep up to date the market situation. Like them on facebook, twitter, get on their e-mail list, etc.
Recently Priced IPOs – This lists the latest new stocks that have just come on the market. If you can find that right stock that has potential for great growth, you could do well with early investment.
Islamic Rulings on Stocks
As the fatwas and articles below will show, stock trading in general is permissible as long as certain conditions are met. Therefore, not all stocks are permissible for Muslims to trade with and precaution should be taken by God-conscious Muslims.
Working With Islamic Finance – This is a non-Muslim website but has a nice write up on the topic and includes a section on stocks.
Islamic Based Investment Companies
Since for most people trying to figure out which stocks are halal and which are not is a hassle and not an easy task, there are many Muslim based investment companies out there that do the heavy lifting of Sharia compliant stock research for you. Following are a few that I am aware of:
At sign up, they ask you a few questions and assess your risk tolerance and ideal investment strategy. Then based on your risk level (derived from your answers), they recommend to you one of their eight investment portfolio options (conservative, moderate, aggressive, etc.). If you’re happy with it, then you can fund your account and invest and hope it does well. You can also choose a different portfolio than the one they recommend. In addition, they recently launched a Halal Stock Screener app which you can use to find out if a particular stock is Islamically ethical to invest in or not.
Update (10/10/2018): Wahed has announced that it is now offering halal index funds! This is very unique and the only product of its sort that I am aware of. Index funds are considered the best way to invest for individuals in the long run for retirement but there was, before Wahed, practically no way to do it in a halal manner. It looks very promising so be sure to look into it!
They choose the Sharia compliant investments for you without asking you. Your only job is to tell them what type of fund you want to invest in (income, growth, etc.) and they will take it from there. It’s a good option if you don’t want much control and just want to do things on auto pilot.
Same as Amana model
Same as Amana model
This is a recent project by Sh. Joe Bradford, an Islamic finance expert, and offers Sharia compliant trade alert service for a monthly fee. So they don’t invest anything on your behalf. They just tell you what type of stocks are Sharia compliant and what types are not.
They require at least $100k to be able to invest with them according to one of their representatives that I spoke with at an event.
This is not a stock investment but I’m including it here because it is a Shariah compliant investment option for Muslims. Basically, they own properties from which they collect rent. Rental income from homes and any appreciation of property value is distributed as dividends among the investors.
As you can see from the above, stock picking requires a lot of research and work. It is not an easy task. At the end of the day, the market is unpredictable and you cannot be certain if you will keep or lose your money. Even the legendary stock picking guru Warren Buffett does not recommend delving into individual stocks. This is why if you are thinking of doing individual stock investments, then pick well established companies, diversify your portfolio, and stick in there for the long term and not short term. If you don’t want the headache of doing the research, both Islamic and secular on the particular stock, then just stick to an Islamic based, low fee investment option and keep investing a certain amount monthly into that account. However, if you want to delve into daily trading for the ‘love of the game’, then may Allah make it easy for you.