Penny Stock investment is a type of investment in which you invest your money in companies whose stock price is less than $5 per share. The following article will give a brief guide on investing in penny stocks in a Halal way.
Understanding Penny Stocks
Penny stocks are those investors buy and sell at a pretty low price. The exact cost of penny stocks can differ from one country to another. For instance, when the stock price is less than 5$, 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 between $250 million and $2 billion.
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 possess 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 typically low, as they are mainly traded via over-the-counter (OTC). As a result, the investor may not always be able to sell the shares promptly. Low liquidity may also contribute to 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 may not be subject to the same reporting requirements as larger public companies do. Moreover, these stocks have little coverage by professional analysts. 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 via over-the-counter (OTC).
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 state that the revenue generated from non-Shariah-compliant operations should not exceed 5% of the company’s revenue.
- Interest-bearing loan (debt) should not exceed the threshold. 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 assets and securities should not exceed 30% of the total market cap (AAOIFI).
- 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 can be Shariah-compliant depending on each company in the stock market.
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