Islamic Capital Markets: Theory and Practice

Chapter 4

Islamic Stocks

This chapter is devoted to Islamic stocks and Islamic stock markets. Stocks obey a Sharia screening to qualify for being halal (Sharia-compliant). Indices for Islamic stocks are tracked on many exchanges. The issue of speculation is discussed from a Sharia perspective. Speculation is different from gambling; although it is permissible, it can become a major source of bubbles and crashes in stock markets. The chapter analyzes stock yields, stock valuation, stock price forecasting, fundamental and technical analysis, efficiency hypotheses of stock markets, the evaluation of companies, and the mechanics of trading.

Islamic finance emphasizes risk-sharing. Interest-based loans are strictly forbidden. Although lending is perfectly legitimate, it has to be free of interest. Consequently, traditional lending by the banking system has no significant role to play in Islamic finance. The stock market is the best fit for Islamic finance and promotes risk-sharing. It enables people to direct saving to investment, and stockholders earn a profit (dividend) and not interest. The stock market enhances economic growth and employment, and reduces financial instability that follows from traditional lending. The stock market was a historical necessity that enables banks and investors to overcome constraints on saving and investment. Developing an efficient stock market provides the means for business to raise long-term capital while affording a degree of liquidity for investors. ...