If you’ve ever wanted to invest, you’ve probably heard of stocks or shares. In the simplest terms, a stock is a part of your ownership in a company. It is a claim to the underlying property of that business, namely its assets and earnings. Let’s say a company has issued 100 shares of its company. When you buy one share of that company, then you own 1/100th of that company. If the company owned only one dollar, you would own one penny of that dollar. In real world terms, what your stock or share means is you are owner of 1/100th of its debts, its assets, and its earnings. Before the internet age, this ownership was usually represented by a stock certificate. Nowadays you will hardly every see that. Instead you will see the stock appear in your brokerage account electronically. Once you own a share or stock, you are now a shareholder. If there is a profit, you share in this profit through an increased share value or the distribution of a dividend. This position gives you certain rights. Depending on the type of stock you own and how many of them you own in one company, you may have voting rights. There are plenty of resources out there that go into the particulars of this. What is important for you as an investor here is the financial makeup of the company and what this means to you.
The most important thing for you as an investor is your claim over the companies assets and earnings. Even more important for you as a Muslim investor is whether or not the assets and earnings activities agree with your value proposition. To do this you will need to look at the companies primary and secondary earnings activities.
For primary earnings activities, you should avoid investing in sectors centered on one of the following:
1) Alcohol, Tobacco, and drugs,
2) Gambling and betting operations,
3) Cinema, Adult entertainment, Advertising and media,
4) Conventional financial services,
5) Defense and weapons manufacturing,
6) Food and Beverage sectors involved in the sale of prohibited items, like pork and alcoholic beverages.
The reasons for the above should be obvious to most of you. As Muslims, we are prohibited from actively participating or assisting what is forbidden. As long as a company’s primary earnings activities are permitted, if it engages in any secondary earnings activities that are forbidden or are questionable, it is still permitted to invest in it as long as the secondary earnings are less than 5% of total revenues. Although this is allowed, Islamic Law still dictates that that these earnings need to be absolved. Some scholars call this process “Purification,” while I prefer “Absolution.” We will cover more about purification/absolution at another time.
Why is this important to you? Well for one, you want to make sure that what you invest in meets your ethical standards. Second, you will need to know what all this means in situations when you may have no control over what happens to your investments, like when you invest in an index fund or your company does so on your behalf (like in a 401k).
For more in this series, click below:
- Building an Investment Strategy: 4 simple steps to get you started
- The Anatomy of a Stock (this article)
- Passive Vs. Active Investing (forthcoming)
- Index Funds: The Basics (forthcoming)
- How to deal with Impermissible Earnings (forthcoming)