Fundamentals of Islamic Money and Capital Markets

Chapter 6

Shariah-Compliant Equity

Learning outcomes

At the end of this chapter, you should be able to:

1 Distinguish between conventional and Shariah-compliant equity securities.

2 Explain the screening process of Shariah-compliant equity securities.

Introduction

Equity securities, commonly known as shares or stocks, are representing an ownership interest in a corporation or financial assets. However, owning shares in a business does not mean that the shareholder has direct control over the daily business activities; it only entitles the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of equity securities are common stock and preferred stock. The main difference between these two forms of equity securities lies in the degree to which they contribute to any distribution of earnings and the priority given during the distribution of earnings (Fabozzi et al., 2012; Madura, 2010). In details, preferred stockholders are entitled to a fixed dividend that they receive before common stockholders may receive their dividends (see Table 6.1). Among the benefits of preferred stockholders are:

• Preferred stockholders dividends are fixed, so they do not participate in increases or decreases in the company’s profits as common stockholders do.
• Although debt holders are the highest priority if the company is bankrupt and liquidated, the preferred stockholders have a higher priority than common stockholders.
• Dividends of preferred ...