Buying with the Intention of Capital Gain

Answered by Mufti Muhammad ibn Adam al-Kawthari

Question: Is it permissible to purchase shares with the intention of capital gain?

Answer: In the Name of Allah, Most Merciful

Shares from the stock market are generally purchased for two reasons. Some people purchase shares for the purpose of investment, hence their main aim is to become a shareholder in a company’s assets and receive the annual dividend. Others, on the contrary, purchase shares with the intention of capital gain, in that they speculate as to which shares’ value will increase and then purchase them. In other words, they purchase shares when its price is low and then sell them when its value increases; hence their aim is to make profit.

Some contemporary scholars have reservations with regards to dealing in shares with the intention of capital gain. Their basic argument is that purchasing and selling shares with the intention of capital gain is based on speculation, hence giving permission to transact in shares on this basis will open the door for gambling (qimar), which has been decisively prohibited in Shariah. Thus, according to these scholars, it will only be permitted to trade in shares with the intention of investment and receiving the annual dividend of the company.

This viewpoint, however, is a minority one; hence the majority of contemporary scholars including Shaykh Taqi Usmani, Dr Wahba al-Zuhayli and many others are of the opinion that purchasing shares is permitted regardless of whether one purchases them for capital gain or to receive the annual dividend, provided no other rules of Shariah are violated. (The conditions for the permissibility of trading in shares have been mentioned earlier)

They argue that the ruling of trading in shares is not based on the intention of the purchaser; rather, it is based on whether a “share” qualifies, in of itself, to be purchased and sold. Buying and selling shares of a company is in reality buying and selling one’s proportionate ownership in the company’s assets, hence it is permitted to trade in shares. When it is established that “shares” are a justified article of trade, then, with whatever intention one purchases them, investment or capital gain, it makes no difference. It will be permitted for one to purchase shares with the intention of capital gain, just as it is permissible to purchase them with the intention of receiving the annual dividend.

It should be remembered that speculation is not, in of itself, unlawful or disliked, for that is part and parcel of trade. A trader speculates as to which item’s value has decreased and which item’s value seems to have increased. He purchases items and commodities when their price falls and sells them when the price goes up. Thus, this kind of speculation and guess is not unlawful in Shariah.

What is unlawful is that by speculating one violates a particular injunction and ruling of Shariah, such as selling something that is not in one’s ownership, selling something that is not in one’s physical or constructive possession or getting involved in gambling and other such unlawful matters. Therefore, it will not be permitted to sell shares before they come into one’s ownership or possession. Many times, shares are sold in the stock market without they having come into one’s ownership, neither are they delivered. The idea of the various trading parties is also not to own the shares, rather they merely settle the difference in the end. At times, transactions as many as hundreds take place on a single share in one day. All of this is, without doubt, unlawful and a form of gambling.

In conclusion, the majority of contemporary scholars are of the view that trading in shares is permitted, regardless of whether the intention is capital gain or to receive the annual dividend (provided certain conditions are met, which were discussed in an earlier answer). However, one must ensure not to violate any other injunction of Shariah.

Thus, it will not be permitted to transact in shares where one sells them before actually acquiring its ownership and possession. Short sales, future sales and forward sales are not permitted for this very reason. It will only be permitted to trade in shares if the transaction is at spot and one owns the shares. As far as selling shares before the delivery of the share-certificate is concerned, Shaykh Taqi Usmani is of the opinion that this may be permitted, as the ownership in the company’s assets is established by mere transaction and not the delivery of the certificate. Ownership in the share is legally transferred from the seller to the buyer with the mere transaction taking place, hence it would be permitted to sell the shares before its delivery, although better to avoid.

And Allah knows best
Muhammad ibn Adam
Darul Iftaa
Leicester , UK