3 Types of Stock from Islamic Perspective

Halal investment necessitates a greater understanding of equities, including Types of stock and how to deal with them. Stocks are a sort of investment in which a buyer purchases a stake in a firm at a set price. So, when you buy a firm’s stock, you’re actually buying a small portion of that corporation called a share.

Investors buy a company’s stock at a low price because they expect it to rise in value in the short or long term. The value of the company’s stock rises as a result of this. Following that, the stock will be sold for a profit.

Definition of Stocks

A stock, also being called equity, is a security that holds proportionate ownership of a corporation. When a company needs money to grow, the company can choose to offer ownership shares to the public through stocks. For instance, if a company owns 100,000 shares and you purchase 1,000 of them, you own 1% of the company. When you own company stocks, you can earn more as the company grows, giving you shareholder voting rights.

Types of Stock

There are two main types of stocks: common and preferred. If you are a common stockholder, you usually vote at shareholders’ meetings, and the company gives you dividends. As a preferred stockholder, you do not have voting rights. For example, if there were a vote on the new board of directors, common shareholders may have a say, whereas preferred shareholders would not vote. However, they have a higher claim on assets and earnings compared to the common stockholders. If the company goes bankrupt, the preferred stockholders need to be paid first before common stockholders get anything.

How Stocks Work

Companies sell stocks to gain profit to develop the business, or pay off debt or launch a new product type. When the company issues stocks to the public for the first time, it is called an initial public offering (IPO). After investors purchase shares, they can resell their shares on the stock market, and the exchange tracks the supply and demand of each listed stock.

The buyers will offer a “bid” which means the highest amount they are willing to pay and typically it is lower than the price sellers “ask” for. If a company cannot perform well and the value of its shares decreases, shareholders can lose part or all of the investments when they sell.

Even if the whole process looks quite complicated, computer algorithms do most of the work, including price-setting calculations.

Types of stock market companies from Islamic Perspective and Halal Investment

When we think about trading markets or companies, we can categorize them into three types from Shariah perspective:

1. Stocks from permissible practices (halal investment)- shipping, manufacturing, clothing, pharmacy, medical equipment, real estate, furniture, tools, and other industries that are free from haram practices or transactions such as lending or borrowing on the basis of riba (interest). These are the companies which we can call “clean

2. Stocks based on prohibited practices – companies that trade in spheres of tourism, alcohol, hotels, adult entertainment, riba-based banks, some insurance companies are not acceptable in Shariah laws. The stocks under these conditions are haram.

3. Stocks based on partly haram practices – The part of their work is permissible, however, some of their work is against Shariah. For example, some transportation companies hold riba based accounts, or their finances are managed by interest-based loans. We call companies in this type a “mixed companies

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