Penny Stock Investment: A Complete Guide for Muslims

Penny Stock Investment: A Complete Guide for Muslims

Penny Stock investment is a type of investment in which you invest your money in companies whose stock price is less than $5 per share. The following article will give a brief guide on penny stocks in a halal way.

Understanding Penny Stocks

Penny stocks are those investors buy and sell at a pretty low price. The exact cost of penny stocks can differ from one country to another. For instance, when the stock price is less than 5$, it is a penny stock. On the other hand, the price of penny stock in the UK is less than £1. Meanwhile, in India, penny stocks are below Rs 10.

Penny stocks often fall under the category of small-cap companies, companies whose market capitalization is below $250 million or $300 million.

These stocks are often traded in OTCs; however, some are also traded in big exchanges, such as NASDAQ or the New York Stock Exchange.

Penny Stock Investment

Like other stocks, penny stocks can also be a good investment vehicle. However, investing in penny stocks is not the right choice for every investor. The penny stocks own higher risk due to their high volatility and low liquidity. Let’s be more transparent and critical on this. In the following, we will introduce the characteristics of penny stocks.

Characteristics of Penny Stocks Investment:
  • Low liquidity

The liquidity of penny stocks is low, as they are mainly traded over the counter. In addition, the investor may not always be able to sell the shares on time. Low liquidity may also affect low trading volumes.

  • Lack of historical information

Most of the penny stocks are stocks of relatively young companies with a lack of historical information. The companies have a limited proven track record. The record includes operations, products, assets, or revenues. Therefore, investing in such companies is risky.

  • Lack of public information

The small-cap companies that offer penny stocks do not have to file reports with the regulatory authorities. Moreover, professional analysts do not cover these stocks under their recommendations. Therefore, finding enough information about penny stocks you will invest in can be pretty challenging.

  • No minimum listing requirements

The companies that offer penny stocks do not have minimum listing requirements because penny stocks are mainly traded over the counter.

Are Penny Stocks Halal?

According to the Shariah Rules, stock investment is permissible as long as companies meet these criteria:

  • The company should operate in permissible activities guided by Islamic principles
  • Though the overall business is halal, the company can carry out minor haram activities. Most institutions and standard-setting bodies like AAOIFI limit the revenue generated from non-Shariah-compliant operations should not exceed 5% of the company’s revenue.
  • Threshold on interest-bearing loan (debt). According to AAOIFI, investing in companies with total long and short-term debt of more than 30% of market capitalization is not shariah compliant.
  • The total interest-bearing securities should not exceed 30% of the total market cap (AAOIFI). While the interest income must be less than 5% of the total income or revenue.
  • Additionally, Shariah advisors in the leading financial institutions have set limits on the proportion of cash and receivables to total assets not to exceed 33% to avoid this situation (according to SC Malaysia, and DJIM, while MSCI Global Islamic Indices threshold is 33.33%)

Based on the conditions mentioned above, penny stocks are Shariah-Compliant depending on each company in the stock market.

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