INVESTMENT SPECULATION AND

GAMBLING IN EQUITY MARKET

PREPARED BY: NORLINA ZOLHAN (2014907313)PREPARED FOR : DR. MOHAMMAD FIRDAUS MOHAMMAD HATTA

2

INTRODUCTIONEQUITY MARKET

The equity market (often referred to as the stock market) is the market for trading equity instruments. Stocks are securities that are claim on the earnings and assets of corporation.

By definition, a stock represents a shareholder’s share in the company. It is the document that gives the shareholder proof of his right to stake in the company’s wealth comprising its paid-up capital, assets and retained profits

Like conventional stock market, Islamic stock market must also have a market place for transaction, pricing mechanism, and the commodities. Apparently, the characteristics and implementation for Islamic stock market is totally diverse.

3

According to Ali and Gari (1993), a stock exchange may also complement the banking system. This means it would be possible to consider the investment opportunities offered by Islamic banks, as a basis for measuring the return and risk in other investment portfolios.

PRINCIPLE OF ISLAMIC EQUITY INVESTMENTi. Prohibition of riba (no guaranteed fixed return)ii. Prohibition of gharar (uncertainty with deceit) and maysir

(gambling)iii. Primary business activity must be in line with shariahiv. Majority of assets must be illiquid

4

SHARIAH RULINGSAccording to Ali and Gari (1993), in relation to the shariah rulings, there is no prohibition in Islam to involve in any investment activities. Furthermore, there seems to be a consensus of opinion among contemporary Muslim jurists on the permissibility of exchanging common stock through buying and selling transactions. This is based on custom (urf), applying the legal maxim that which is known as “custom shall have the force of that which is stipulated as a condItion”.

Investing in ordinary shares is permissible if the main business of the company is in compliant with shariah ruling. Similarly, to purchase, to hold or sells its share is permissible even if the company was to undertake prohibited activities such as borrowing money or invest its money on the basis of interest, the company can still be invested, provided that they fulfill certain criteria (Islamic Fiqh Academy).

5

According to Osmani (2009), selling a common share is like selling a portion of a capital of the company. So, it is legal according to most of the scholars.share is one’s own propertyIt also does not contains gharar as the price is determined

according to the existing market during its purchase.

Conversely, short selling is not valid in the shariah as it is like gambling and cheating the buyer as the seller sells the product that he borrows but he does not own it. However, if the investor buys the stock from the broker and afterward sells it, then it is allowed in the shariah.

6

In relation to the above, the OIC (Organization of Islamic Conference) gives resolutions to dealt with purchasing stocks. This can be summarize as follows;

i. Stock of companies whose products are not permitted in Shariah are prohibited to own, purchase, sell etc.

ii. Stocks of companies that abide by rules of Shariah, such as Islamic banks and Islamic insurance companies are permissible.

iii. Stocks of companies whose products are permissible but the company involves in non-allowed transaction such as getting interest based financing, depositing in banks for interest, making contract that include prohibited conditions. Also companies that produce permissible products but also produce non permissible products as a minor line of production.

7

SPECULATION AND GAMBLING

According to Zaman (1986), “Muslims are encouraged to seek economy bounties which God has made available to them”. From the above it is evident that Muslims are increasingly interested in halal securities traded in stock markets all around the world in order to earn the economic benefits.

However, there must be one to predict future value of a stock prior to making any decision either to buy or to sell the asset. This has raised the issues whether speculation in stock markets is gambling and thus forbidden.

The Quran clearly prohibit us from gambling as illustrated by the following verses relating to games of chance or gambling, referred to in Arabic as maysir; Allah SWT says;

“They will ask thee about intoxicants and games of chance. Say: In both there is great evil as well as some benefit for man; but the evil which they cause is greater than the benefit which they bring." Quran (2: 219)

8

The Messenger of Allah (SAW) also forbade us from gambling as illustrated in the following Hadith;From Abu Hurayrah (RA), that he said, "The Messenger of God forbade the 'sale of the pebble' [hasah] [sale of an object chosen or determined by the throwing of a pebble], and the sale of al-gharar. (Sahih Muslim).

Ibn Taymiyah’s opinion on the above Hadith is that gharar as the consequence of which is unknown and goes further to claim

that selling it involves maysir, which is gambling.

Being given the obvious prohibition of gambling in both the Quran and the Hadith of the Prophet (SAW), it is of utmost importance to determine whether speculation in the stock

market is similar to gambling.

9

SPECULATION IN ISLAMIC STOCK MARKET

Speculation has been defines as “the practice of buying or selling with the motive of then selling and buying and thus making profit. If prices have changed a speculator will hold only the asset or liability, hoping that at the time the contract matures, events will have moved into his favor. According to El-Ashkar (1995), speculation may be defined as the practice of:o Using available informationo Anticipate future price movements of securitieso An action of buying or selling securities may be taken with a view too Buying or selling securities in order too Realize capital gains and/or maximize the capitalized value of security-

holdings

10

In particular with the speculation in Islamic stock market, Ashkar pointed out the following points:a) All investors or at least a part of them could be said to be

speculators - They buy securities on the hope that their prices will move up in the future and they will be able to realize capital gains. If they know that prices would fall they would have acted differently.

b) Speculation has mistakenly been equated with gambling - From the earlier definition, it can be seen that speculation involves a great deal of computation where highly developed computation techniques are hardly to be game of chance. It is a process that relies on the analysis of a lot of economic and financial data, companies financial reports, political decisions, information about management skills as well as personal profile of decision makers.

c) Regarding our attention to gharar and speculation, it suffices to say that in speculation the conditions of the deal are clear to both parties with no ambiguity on either.

11

d) Speculation may help activate the market. At times when the market is weak, with very few investors willing to buy or sell

speculators may enter the market and buying selling securities. This can help activate the market. The implications of this can be seen in relation to the ability of firms to raise funds.

e) Speculation may help stabilize prize. At the time when prices of securities may be artificially moving up or down, speculators who have ability to judge and properly calculate what can be viewed as the real value of security can act in a manner that can offset the effect of the artificial move.

The above description of El-Ashkar relies on the availability of information to differentiate speculation from gambling. It seems that the absence of information or even lack of it may mean that speculation may become very close to gambling. However speculation can hardly be viewed as a game of chance.

12

The sale of gharar is said to lead to maysir (gambling) which leads to oppression and is therefore prohibited in Islam. It is evident that gharar is not present in speculation in stock markets as each party is clear to the quantity, specification, price, time and place of delivery of the object. Moreover, the object of the transaction, which is the purchased security, is available in the market at the time of transaction and is, bound to be available at the time of delivery. Therefore, speculation has no element of gharar and, hence, does not lead to maysir.

SAC of Securities Commission also had resolved this issues;At a glance, speculation and gambling appear to be similar in practices. As such, the exthortation not to treat the share market as casino. This perceptaion arises because speculators enter the market depending solely on luck, in which similar to gambling.The share market is not a place for gambling. On the other hand, the share market is a place which allows shareholders to dispose ownership of shares to other investors in order to gain liquidity.

13

CONCLUSIONInvesting in equity market is permissible if the main business of the company is in compliant with shariah ruling

The above discussion has proved that although speculation in the stock markets may look like gambling, yet it is by no means similar to gambling. Whether it is gambling or not, it depends on the conduct of the investors who enter and leave the market as well as their motives.

A reasonable degree of speculation would be required and indeed needed, if the market is to be active and operative. There is no doubt in mind that excessive speculation should not be allowed, but it is equally clear that a market without an acceptable degree of speculation would not be workable.