I would like clarity on the basis for the two methods for determining when purchasing a stock constitutes genuine ownership in a company, in which case the zakat on that stock is calculated based on the zakatable assets of the company divided by your ownership percentage.
Method 1. aaoifi standard: purchasing a stock primarily for its dividends makes you an owner, so you use the zakatable assets. Purchasing primarily for its capital appreciate makes it a product, so you must pay zakat on the full value.
Method 2. purchasing a stock for long-term benefit (appreciation or dividend) makes you an owner. Short-term holding requires zakat on the full value.
I believe IFG endorses method 2, while AAOIFI is a major industry standard. However, I have not found any basis or evidence provided for either method online. Do you know any basis in sunnah for choosing either length of holding or method of ROI as the method for determining ownership?
May Allah bless you.
Can you point out where did you read about method two on IFG website?
It is described in the main article by Islamic finance guru on calculating zakat for stocks. Calculating Zakat on Shares - Paying Zakat in Islam | IFG
I do not see any differences between the two methods.
All scholars agree that anything you buy with the intention of selling, then zakat will be due on its full market value. This is considered to be a business asset for zakat purposes, which has a different definition to accounting principles.
When you purchase shares for trading, then zakat will be due on the full market value of the shares based on the above. In the zakat context, we call that buying for short term i.e buying for selling. Again this definition would be used in a different context in the financial indutry.
Secondly, when you purchase shares for long term purposes, then as you pointed out, the zakat will be due on the zakatable assets of the company, and not the full market value of the shares. In the zakat context, buying for long term refers to buying with no intention of trading.
In both cases, whether you buy for long term/short term, you must have the ownership of the shares to pay the zakat.
I hope this makes more sense inshaAllah.