Leverage in Forex Trading You Must Know

Forex trading is a condition where we can buy and sell foreign exchange to get profit, and it may include leverage. If someone wants to do forex trading, they will need a big amount of money and not everyone is capable to do that. Thus, there is a feature called leverage. What is leverage? What is the Islamic point of view about it? In today’s article, we will look deeper into leverage and decide whether or not we should use it.

What is the definition of leverage?

Leverage in forex is a special feature provided by the broker to help the trader buy and control the whole price. For example, let say you have $200 in your forex trading account. and you want to do forex trading. But, the contract rule requires you to pay a minimum of $1000. It means you still need $800 so that you can do trading.

In this situation, you can ask for leverage from the broker, and he will give you access to control the $1000 fully. There are some leverage ratios that you can choose based on your capability. For example, let say you choose the ratio of 1:500. This means you can control $500 equity by only having $1. Therefore, you can do forex trading and gaining profit and loss based on your activity during the contract.

Then, the question is; “is it permissible”?

First and foremost, we have to remember that forex trading itself is not sharia-compliant based on the fatwa of majority scholars. Even the Indonesian Ulema Council says the only permissible way to do forex trading is an on-the-spot transaction and not used for speculation. This clearly states that if forex trading is not sharia-compliant, let alone its features.

Secondly, any benefit generated from a loan is riba. Even if the leverage charges zero per cent of interest, the broker does not do that for charity purposes. The more leverage that the trader buys, there will be more increasing sales. And if the trader is not careful enough, they will gain loss more than profit. Otherwise, the broker will not bear any loss.

Thirdly, the prophet Muhammad (PBUH) already warned us to not sell something we do not own. In stock trading, we have to pay the full stock price if we want to sell it later. Otherwise, it is different from the leverage feature. We do not have to pay the full price to fully owned the asset. Thus, we also can say that we sell something we do not own.

To read more about Islamic Finance related topics, please click here and visit our academy.

Besides, feel free to sign up for our free stock screening services at musaffa.com.