What Makes it Different Between Conventional and Islamic Equity Markets?

This article will briefly explain the difference between conventional and Islamic equity markets. But before that, you need to understand what is equity market.

What is Equity Market?

Equity markets are the place for buyers and sellers of stocks. The public-listed companies’ stocks are traded through the stock exchange, while the private stocks are traded through over the counter (OTC), usually through dealers. Companies can use the equity markets to fund investments, mergers and acquisitions, and develop or launch new businesses.

Stocks are the primary instruments of the equity market. Other instruments or investment vehicles based on stocks include Exchange Traded Funds (ETFs), Real Estate Investment Trust (REIT), mutual funds, and private equity.

Conventional Equity Markets

Differences between conventional and Islamic equity markets is quite an interesting topic for Muslim investors. In a financial system, capital comes from investors via capital markets. They employ financial instruments such as debt, equity, and derivatives. Raising capital is equally vital in both the conventional and Islamic capital markets, with the exception that the kind of investments and investor choices varies significantly.

A traditional market permits and even encourages investors to participate in whatever industry they want. This could be any type of business or sector. They can be traditional financial services based on interest speculation and/or gambling. In addition, the business activities that also includes food and beverage enterprises with core business interests in pork or alcohol.

Islamic Equity Markets

However, the approach to investing is significantly different in Islamic Capital Markets. Shariah principles strictly require that investing in this market must be free from usury (riba), gambling (maysir) and ambiguity (gharar). Investing in commodities like liquor and tobacco is also not permissible. The ban on interest in all economic activities is clear and remains uncompromisable in Islamic principles. Businesses should avoid sinful products and services in their portfolios.

When assessing what is halal or haram in their investment dealings, the Islamic faith emphasizes the need to be aware of Shariah requirements. For instance, Malaysia’s Islamic Banking Act and Takaful Act have created a robust and comprehensive framework for Shariah investing during the previous 37 years.

Through constant innovation and development, several Islamic products are flourishing. Islamic Equities, Islamic Unit Trusts, Islamic ETFs (Exchange Traded Funds), Islamic mutual funds have also become the major contributor to sustainable investment assets. Moreover, the government has continuously supported the growth of the Islamic Capital Market space.

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