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REPORT

ON

CONCEPT OF STOCK MARKET THROUGH

ISLAMIC PERSPECTIVE

Name: Waqas Abrar

ID : 2224

Submitted to:

Sir Farhan Mehboob



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Table of Contents

S.No Particulars Page. No

1. Introduction 3

2. How stock market works? 3-4

3. Complete process 5

4. Exchange of share from Shariah perspective 5-6

5. Determination of Islamic Model 6-7

6. Partnership 7-8

7. Conclusion 9

8. References 10



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Concept of Stock Market through Islamic Perspective

Introduction

Stock market is a place where ownership of financial securities like stocks are bought and sold

In Islam stock market is completely haraam (unlawful). Ownership in sold in the form of

shares, which have prices attached. The share price determines the over all price of the

company. Such a specialized market did not exist at the time of the prophet, but there is

nothing un-Islamic about the idea.

How Stock Market Works?

The stock market is determined only by supply & demand. The number of shares of stock

obtainable on the market dictates the supply & the number of shares that investors require to

buy dictates the demand. It is vital to understand that for every share that is bought, there is

someone on the other finish selling that share or vice versa. When people views of the stock

market or individual stocks change (which can be driven by economic fundamentals,

consumer confidence, fear of terrorism, or company earnings), the demand for stock changes

This also causes the prices to change. For example, if people in general think that the economy

is growing, they become more optimistic & require owning more stock. This increases the

demand for stock. Simultaneously, since people are selling less stock, it also decreases the

supply of stock on the market. Both of these factors cause the average stock cost to rise.

The stock market is really a big, automated superstore where everyone goes to trade their

stock. The main group of actors in the stock market is the exchanges. The main exchanges are

the NASDAQ, the New York Stock Exchange, all of the ECNs and a few further regional

exchanges like the American Stock Exchange and the Pacific Stock Exchange.

Years ago, all of the trading was executed through the traditional exchanges but now almost

all of the trading is done through the NASDAQ.



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To provide you a good idea of what happens at the back, here's a case of one of the many ways

that the stock market works:

You opened an account with a trading company. You send a check for $1,000. Company

deposits the check in to a trading account that is programmed under your name. You log onto

Company‟s website & leave an order to buy 100 shares of a stock in corporation X, which iscurrently trading at $5. Company makes use of its network to tell the NASDAQ & all of its

interrelated networks that there is demand for 100 shares of Company X's stock. The NASDAQ

finds someone who is prepared to sell 100 shares of Company X &, right away, they

implement the trading of stock between you & that who is selling the shares. The trade

information is sent to a clearinghouse where the information is put in to system & the shares

will now be registered for you. Fundamentally, the clearinghouse will pick 100 shares of

Company X to trading company & trading company will assign those 100 shares by yourname. The actual stock certificates are normally held "in street name" at the brokerage & never

need to exchange hands (although you could request that the stock certificates be transferred

to your name & held by you).

That is how the stock market works. It facilitates the trade of goods between interested parties

and works to trim down distribution costs and set prices.



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Complete Process

Here's what has to happen:

1. You place the order with your broker to buy 100 shares of the X Company.

2. The broker sends the order to the firm's order department.

3. The order department sends the order to the firm's clerk who works on the floor of the

exchange where shares of X Company are traded.

4. The clerk gives the order to the firm's floor trader, who also works on the exchange

floor.

5. The floor trader goes to the specialist's post for X Company and finds another floor

trader who is willing to sell shares of Company X.

6. The traders agree on a price.

7. The order is executed.

8. The floor trader reports the trade to the clerk and the order department.

9. The order department confirms the order with the broker.

10. The broker confirms the trade with you.

Exchange of Shares from Shariah Perspective

Business share over the same meaning as a partner‟s share in the juristic financial Company. It

is the document which testifies a partner‟s possession of an element of the company‟s paid up

capital, in terms of assets & retained profit. They are fretful here with ordinary shares, since

their attainment is allowed by Islamic jurists to the barring of non-permitted interest-bearing

bonds, debentures & favored shares.

Juristic agreement also seems to agree of the current practice which allows free market

exchange of ordinary corporate share, through appeal to the juristic custom that acceptedconvention is like an unambiguous condition. But the nub of the issue is that the act of buying

a share cannot be visualized like the act of buying any ordinary product anticipated to satisfy

an individual‟s investment motive.



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Taking the example of the juristic company, Khayat has argued that an element of anticipatory

right can be adopted in the modern company graph as it may confirm useful for its

accomplishment. The anticipatory right is an established property in Shariah, giving existing

shareholders main concern over probable shareholders whenever new shares are issued, or

existing shareholdings are negotiated. More officially it can be defined as “entitlement of a

partner to claim his partner‟s share if it has passed to a third party ‟s hands”. The anticipatory

right is supported by various reports of the Prophet‟s Tradition, most notably the report by

Jabir bin „Abdullah stating that: “The Apostle (PBUH) has imposed shufa on the undivided

plots but when borders are drawn and paths are cut out, there will be no shufa”.

No doubt, the choice of adopting pre-emptive right introduces a significant restraint in the

velocity of shares circulation, thus deviating from the pure model of free exchange on which

the modern stock exchange is based. But in any case shareholders are free to adopt thepreemptive clause or to waive it, depending on what they think about most fit for their

objectives. It is reported in the Prophet‟s tradition that: “people are governed by the conditions

they have agreed upon”. Hence, judging on the Islamic advisability or otherwise of restrained

shares.

How Characteristics of the Islamic Model could be Determined?

importance of Islamic Shariah on the meaning of knowledge about the subject of the sale

means in other words that it is important that the seller and the buyer know what they are

trading, this information is basic to the idea of the consumer‟s or producer‟s economic

shrewdness according to economic theory. Whereas the degree of gharar (uncertainty) in sales

of physical property is irrelevant, thus making the principle of an open market suitable and

not conflicting with competence to a noticeable degree, the degree of such gharar in the sale of

shares and stocks is not unimportant. Towards an Islamic Model of Stock Market principle of

an open financial market. Phrased in such a manner, it is hoped that this statement have

succeeded in explaining the nature of harmony between compliance with the controls of

Shariah and the necessity for an efficient financial market.



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Following are some of the features that should, in our opinion, characterize the Islamic model

of stock market:

1) Subordination of the Financial Market to the Corporeal Property Market, in the sense that

movements of the financial market ought to follow & be strongly linked to movements in the

corporeal property market; this means supremacy of the actual economic knowledge indirecting the movement of stocks.

2) Market values are based on long-term expectations in lieu of short-term changes; this would

limit purely speculative trends & encourage long-term investments.

3) Satisfaction of the motives of the community of investors is not limited to the expected

funds returns only; it goes beyond that to satisfy the desire of positive participation to

accomplish the economic objectives of the Muslim society.

The Concept of Partnership in Islamic Jurisprudence

It is preferable to discuss this subject through brief Islamic juridical surroundings of the modes

of investment association (i.e. the idea of Shirkah) as present in our legacy of Islamic

jurisprudence. This will include a speedy conversation of the opinions of Muslim jurists on the

subject, but without getting in to details of the points of divergence among them. Possibly the

most significant issue that faced modern Muslim jurists, after laying down the values

governing the issue of Riba (interest), is that of the Shariah position regarding the modern joint

stock company with a legal and financial character independent of its constituent

shareholders, a kind of investment organization that has no existence historically in the past

Islamic eras. Types of Shirkat in Islamic jurisprudence may be divided into the following

categories:

(a) Shirkat-ul-Amwal (Stock Companies)

These are forms of partnership in which two or more associates agree to participate in viable

activities, each contributing a specific share of liquid funds.



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This type of partnership may further fall into one of two categories; the first is called sharikat

al-Mufawadah, the second Shirkat al-„Inan.

In Shirkat al-„inan the partners authorize each other to act autonomously in making business

decisions and agree to be bound by such decisions, whether made in the presence or absence

of the partners who made them. Sharikat al-mufawadah is recognized by the Hanafi andMaliki schools of Islamic jurisprudence, but is rejected by the Shafi„i school, which recognizes

along with the Zahiri, Hanbali and Ja„fari schools sharikat al-„inan only.

(b) Shirkat-ul-Sanai

This type of partnership is normally concluded between tradesmen or craftsmen of the same

or different trade or craft, where they agree to accept work assignments & to split the gains

among themselves.

(c) Shirkat-ul-Wujuh

The Malikis do not permit this type of partnership as known to them, where a man of high

stature and good reputation would sell to an unknown person who is the capital owner. The

Hanafis, however, see this form as partnership between two persons having no capital of their

own, who undertake commercial activities using the maal (wealth, capital) of a third partywhere the partners draw on their goodwill and reputation to purchase commodities on credit

and sell the same in cash. This form of partnership is recognized by the Hanafis and Hanbalis

as mufawadah or „inan forms.

(d) Mudarabah

This form of partnership involves payment of one partner (called Rabb-ul-maal, capital owner)

to another (called Mudarib, manager) to invest it in a commercial enterprise for an agreed

common share in the profit realized. Details of the rules governing this form of partnership

have been spelled out in detail in both classical and modern sources of Islamic jurisprudence

and need not be dwelt upon here.



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It is noted that the concept of a stock company according to current terminology is different

from that in the Islamic juristic parlance; we find that a stock company, whether of the „inan or

mufawadah type, depends on the partners who participate therein by contributing both

wealth and work.

Conclusion

Stock market is a place where ownership of financial securities like stocks are bought and sold

We saw that how stock markets works, then we saw the process through which stock market

works, the we saw exchange of shares from Shariah perspective, then we saw how Islamic

model can be implemented and what are the important elements to incorporate in order to

form Islamic stock exchange and the we saw the concept of partnership in which we discussed

about Shirkat ul Amwal, Shirkat ul Wujuh, Mudarabah etc.The discussion about the stock

market about whether it is halaal or haraam is very important because most of the people

don‟t have knowledge that stock market is haraam because it has the elements which are

against the Islamic laws and principles. Following are the elements:

Riba (Usury or Interest)

Gharar (Uncertainties)

Qimar (One party gain on the behalf of other party‟s loss)

Kazab (Lying and Misleading)

Maisir (Gambling)

Therefore, in order to establish a pure Islamic stock market it is necessary to implement

Shariah very first. If Shariah is implemented all the unlawful elements which make stock

market haraam will be eliminated and we will be able to establish Islamic stock exchange.



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References

1) http://www.abcstockinvesting.com

2) islamiccenter.kau.edu.sa/arabic/Magallah/Pdf/8/08-SEIF_05.pdf

3) www.irti.org/.../Vol%201-1..Ali%20Al-Qari

4) atrc.net.pk/resources/shariah_compliance/stockmarket.pdf

5) www.islamic-truth.co.uk

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