Islam has provided guidelines and principles for all aspects of a Muslim’s life, including finances and business. When it comes to trading and investing, Muslims have to adhere to certain Islamic laws and practices. Here are some of the key trading rules for Muslims.
Is Trading Haram?
As a Muslim, your first question will be whether trading is Haram. The linked article on is trading Haram looks at the topic in more detail, but the main principles you need to consider are below.
Avoid Riba (Interest)
One of the most important principles in Islamic finance is the prohibition of Riba, generally interpreted as interest. Taking or paying interest is considered haram (forbidden) in Islam. So, Muslims are not allowed to invest in bonds, fixed deposits, or any interest-bearing financial instruments. They need to avoid leveraged trading as well where interest may be charged.
Avoid Forbidden Products and Services
Muslims should avoid investing in or facilitating the sale/production of products and services considered haram in Islam. This includes alcohol, tobacco, pork products, conventional banking services, gambling, p*rnography, weapons, etc. So, they have to screen any potential investments to ensure the underlying business is halal.
Pay Zakat on Trading Gains
Muslims who meet the minimum threshold of wealth are required to pay 2.5% of their wealth annually as zakat (obligatory charity). So, any profits or trading gains are subject to zakat. Muslims must calculate and pay zakat on the market value of their trading portfolio each year.
Trade Ethically
Islam promotes ethical trading practices void of manipulation, greed, speculation, and other unethical means. Traders have to avoid short-selling, day-trading, investing in derivatives and futures which are considered too risky. They should also not engage in insider trading, front running, pumping and dumping, and other deceptive tactics.
Avoid Gharar (Uncertainty)
Gharar refers to excessive uncertainty or ambiguity in contracts or transactions. Trading in instruments, assets, or contracts where the underlying asset, price, or delivery terms are not clear amounts to gharar. So, options, forex trading, and short-selling, which involve such uncertainty, are discouraged in Islamic finance.
Adhere to Halal Standards
Halal means ‘permissible’ according to Islamic law. Muslims have to ensure their entire trading process and portfolio adheres to halal standards. This means working with licensed Islamic brokers, using Islamic accounts to avoid interest, and investing in stocks/sectors that are shariah-compliant.
Consider Investment Objectives
The objectives of Muslim investors should align with Islamic principles of promoting ethical businesses, public interest, and the real economy. Investments should avoid sin sectors and focus on ethical companies. Speculative trading for quick gains is discouraged.
Avoid Excessive Risks
Taking on excessive risks in trading is equated to gambling, which is haram. So, traders have to avoid highly leveraged instruments and trades that entail disproportionate risks. While normal market risks are allowed, deliberate risk-taking for quick gains would violate Islamic principles.
Muslims have to trade ethically, screen investments, avoid prohibited sectors/instruments, pay zakat, and minimize speculation in order to comply with Islamic finance rules. With the availability of Islamic accounts, screening tools, and halal brokers today, Muslims have more shariah-compliant trading options. The Islamic trading principles encourage responsible practices.
