A quote goes, “Always save for the rainy days.” Yeah, many people nowadays want to save but earn at the same time. So, they invest to get high returns. Day trading is a popular form of trading the financial market, which is equivalent to investing—depending on the user. It can be a quick flip or an act of saving for the rainy days.
Is Day Trading halal? Many Muslim traders wonder if they’re still on the path of Islam by trading the stock market. As it is, the rules in Shariah are very clear-cut and will remain the same for all the coming generations. It is, therefore, a challenging task for Islamic scholars to decide whether investing in a new product is permissible.
What is Day Trading?
Day trading is the practice of buying and selling shares or any other securities within one trading day. Day trading of foreign currencies and stocks is the most common. But all marketable securities can be day traded. Regularly, the sudden significant movements of stock or currency prices can greatly benefit day traders.
How Profitable are Day Traders?
Day traders make a profit from buying shares at a lower price and selling them at a higher price. Typically, the day traders are highly skilled and well-funded individuals. They leverage their short-term gain strategies to profit from the price movements of highly liquid stocks.
Although these price movements are negligible, they can be very profitable when dealing with securities in bulk.
Since they have a lot of experience in trading, they know how to get around market fluctuations and turn them into profit. Day traders consider several market conditions that may cause the price of a stock to go up or down.
These can be scheduled events such as a change in economic statistics, corporate earnings, or principal interest rates. Or unexpected changes, such as the first COVID lockdown that shook the stock market.
Is Day Trading Halal?
No, according to most Islamic scholars. You’re probably shocked, right> But let’s check out their explanations.
Dr. Zakir Naik explained the conditions that make your investment halal.
“The stocks you purchase must be from companies who earn revenue through halal activities. The debt-to-equity ratio of the company whose stocks you invest in should not be too high.
Day trading or buying and selling stocks to keep them for just a few hours, one day or a few weeks is speculation, and it is not permitted in Islam.”
He also added, “If you fear that the stocks you purchased might lose their value in the future, you can sell them quickly after buying them, but repeatedly trading them impermissible.” It shows that you can actively manage your portfolio, but day trading involves excessive buying and selling, which is haram.
Day Trading is Halal
No, there is no confusion. Read further, and you’ll understand that you can keep day trading halal. Shall we??
For day trading, you need to have an online brokerage account. There are two types of brokerage accounts.
- Cash Brokerage Accounts
With this account, you can trade only with the cash that you have. If you sell shares, the fund in a cash brokerage account might take a while to arrive. In such cases, you can’t buy the next round of shares until your cash arrives from the past sale, or you add more funds.
Trading via a cash brokerage account, under the right conditions, is halal if you follow the Shariah rules strictly.
So, Day trading is Halal. Some Shariah rules to follow include avoiding investing in risky and impermissible stocks, trading with cash instead of interest-based loans, selling only the stocks that you own, and avoiding trading like gambling.
2. Margin Brokerage Accounts.
Unlike cash brokerage accounts, margin brokerage accounts allow day traders to loan money on interest to day trade if the cash from a previous transaction has not been settled. Interest is haram in Islam, and taking a loan to invest in highly risky stocks is also against the Islamic principles of mutual benefit.
If you incur a loss from day trading, you’ll have to return the entire loan amount taken along with the interest. Since most day-trading strategies employ leverage in margin accounts, day traders can potentially lose more than they have invested and end up in significant debt.
How To Keep Day Trading Halal?
Day trading, which refers to keeping securities for a very short period and then selling them, is haram, according to most Shariah scholars.
However, you can buy and sell shares on the same day to earn a profit if they are in your possession once in a while. For instance, let’s say you purchase 2 shares worth $50 each for $100. In three hours, the price of the shares went up to $60 each, so you want to sell them for $120.
But it can take up to three days for some stocks to be transferred to your name. Prophet Muhammad (SAW) said, narrated by Hakim bin Hizam: ‘Do not sell what is not with you.’ So, selling a stock that you do not own is impermissible.
It’s, however, important to remain careful when you are trading. You might begin trading to have fun, but soon, it can turn into an obsession. Gambling is haram because it is a waste of a Muslim’s time and money. The line was buying and selling stocks becomes gambling, whereas trading becomes haram.
Conclusion
“Is Day trading halal?” is a thought that plagues many Muslim investors. So, Muslim scholars said day trading is speculative and resembles gambling, although it can be halal. Day trading, even if halal under certain conditions, can get very confusing. There are some conditions under which you can buy and sell stocks during the same trading day.
You can check out the conditions above to clear your doubts surrounding whether day trading is halal or not. May the Almighty guide us on the straight path (Ameen).