This is iA the most comprehensive resource for this question on the internet.
We present views from IslamQA, Seekersguidance, and Islamweb, then our resident expert Mufti Faraz Adam presents his views, and finally IFG present a commercial perspective on the matter.
View One: Islamqa
Day trading is defined as the buying and selling of a security/stock within a single trading day. Once the stock owned by the shareholder is sold, it does not belong to him. The repurchase of the stock at a lower price is a separate and completely new transaction. Day trading is permitted provided the underlying traded stock is Shariah Compliant.
And Allah Ta’āla Knows Best
Taken from: https://islamqa.org/hanafi/askimam/103462
View Two: Seekersguidance
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
Leicester , UK
View Three: Islamweb
It is impermissible to sell the purchased item before taking possession of it first. Zayd ibn Thaabit said, " Do not sell it in the spot where you have bought it until you take it to your house for the Messenger of Allaah, sallallaahu ʻalayhi wa sallam, forbade to sell the goods where they are bought until the traders take them into their possession. " [Abu Dawood]
It has been narrated on the authority of Ibn ʻAbbaas that the Prophet, sallallaahu ʻalayhi wa sallam, also forbade the resale of foodstuff by somebody who had bought it unless he had received it with exact full measure. [Al-Bukhari, Muslim, and others] Ibn ʻAbbaas also reported that the Messenger of Allaah, sallallaahu ʻalayhi wa sallam, said, " If anyone buys a grain, he should not sell it until he takes possession of it. " Ibn ʻAbbaas remarked, " I think all things are considered the same in this regard. " Another version reads, " I regard everything like food (so far as this principle is concerned). " [Muslim]
The scholars held different views as to whether the prohibition in this regard includes all purchased items in general or merely foodstuff in particular; the scholarly view that we adopt in Islamweb is that it includes all purchased items.
However, it should be noted that “taking into possession” in this context is determined according to the common practice. Therefore, if registering the shares in your account or transferring them to your online wallet, for instance, is considered an acceptable manner of taking possession of the shares by the buyer according to the definitions and practices of the stock exchanges, then this is acceptable in the sharee’ah and the buyer is entitled to sell them after taking them into possession; otherwise, it would be impermissible.
Dr. Yousuf ibn ʻAbdullaah Ash-Shubayli wrote:
“It is permissible for the owner of shares in a bank to sell them to anyone else, even before its exchange starts (in the stock market), because he has actually bought such shares and taken possession of them as per the sharee’ah given the fact that these shares are legally registered in his name. Accordingly, he is legally entitled to dispose of them as he wishes. Nevertheless, the buyer is not allowed to sell these purchased shares until the shares are transferred to his name; selling the shares before they are transferred to his name is not allowed in the sharee’ah. He cannot sell them to another party before the ownership is legally transferred to him, namely registering the shares in his name for two reasons. Firstly, the buyer in this case, even if he owns the shares, has not taken possession of them as they are still registered in the name of the seller. The Prophet, sallallaahu ʻalayhi wa sallam, deemed the sale of purchased items before taking them into possession forbidden. Secondly, if the shares are traded among multiple parties while still registered under the name of the first seller, then this leads to disputes, conflicts, and loss of rights.”
Hence, it is clear that selling shares in your case is not prohibited on account of selling what you do not own, because you mentioned that you buy the shares first and then sell them, and, therefore, these shares are legally owned by you. However, the problem lies in whether it counts as “taking into possession” as per the sharee’ah or not, as stated above.
Day trading that is carried out in accordance with the Islamic sharee’ah is not similar to gambling. Hence, it is permissible, in principle, unless it is intended merely to manipulate the stock prices or the like. Al-ʻUsaymi wrote, "In principle, it is permissible to partake in day or week trading. There are disadvantages in day and swift trading; however, banning it is practically impossible.”
Allaah knows best.
Mufti Faraz view:
Day trading of shares is permissible on condition that:
- The shares being traded are Shariah compliant.
- Any facility used such as margin or leveraging is also Shariah compliant.
- All the Shariah conditions for sales are fulfilled.
- The order is executed before trading that security.
The buy/sell order to your broker initiates the execution process, and where there is an instant order, the trade is executed almost instantaneously. The trade becomes official after the number of days designated by trade settlement rules. On the last day of the settlement period, the buyer of shares becomes “the owner of record”. For a seller of shares, in many exchanges, he cannot withdraw funds for that trade until it settles, even though the funds are shown immediately in your account. The settlement period for most types of securities is two days. The commonly used abbreviation is T+2 settlement. When you buy stock, the trade settles and you become “the shareholder of record” on the third business day following the trade date. That’s just due to clearing systems in exchanges, but you have almost every right as an owner once the order is executed by the broker.
Thus, from a Fiqh perspective, the execution of the trade is when the ownership (milkiyyah) is transferred. The broker executes the offer and acceptance requirements on behalf of the client and a trade (bay’) is established. After the execution, the trader is exposed to the risk and reward of the security by virtue of their broker, and can execute further transactions (tasarruf) in the security. This exposure and ability to transact satisfy the requirements of possession (Qabdh) from a Shariah perspective as the owner of the shares is now exposed to the risks of the asset.
Day trading with the above conditions is not gambling; the primary difference between the two is that day trading gives you ownership of an asset which you subsequently trade. Gambling is not trading of an asset; it is chancing and staking one’s wealth on a bet taken upon the market movements without any purchase of a security.
The IFG view:
We agree with the above views that day trading is permissible.
However we would strongly caution against embarking on this type of investment strategy with your savings.
To day-trade well you have to spend many many days and months actively involved in the market and learn hard lessons through losses. Day-trading is not something that is suited for every temperament and it is not something most people who start it ever successfully do.
If it is something you’re keen on - do paper-trading initially (i.e. use a practice account with a stockbroker) and see how that goes.
For everyone else, we recommend one of two things:
- Use funds or robo-advisory platforms to take the headache out of investing and let them just do it for you. You can compare all the halal investment funds on our comparison page here (just filter for “stocks & shares”).
- If you’re keen to get more hands-on (I know we personally often are) then learn how to screen stocks in a halal way, invest for the long-term, and pick high-quality and revenue-generating businesses.
You can learn how to screen shares on the stock market for sharia-compliance here.
You can also actually set up an account with a company called SimplyEthical who only show companies on there that are halal. If you mention that you heard about them through IFG when you sign-up it helps us keep the lights on – and doesn’t cost you a penny.