What You Need to Know About Day Trading in Islam

There was a time when only people who worked for large financial institutions, brokerages, and trading houses could trade actively in the capital markets. The rise of the internet and online trading platforms has actively allowed people to trade on the capital market. There are some trading styles that traders adopt in their trading activities. Day trading is one of the most common trading styles. In Islamic finance, every transaction must not contain the element of riba (interest), gharar (uncertainty), and maysir (gambling). Before involving yourself in day trading activity, you need to know about day trading in Islam.

 

What is day trading?

Day trading is an activity of buying and selling a security on a single trading day. Day trading can happen in any market, most commonly in the foreign exchange (forex) and the stock market. The majority of day traders are well-educated and well-funded. Day traders are active traders who execute intraday strategies to profit from price changes for a given asset.

Shariah issue on day trading

Islam does not restrict buying and selling the same asset on the same day. There is no minimum amount of time a person should wait to sell an asset after purchasing it. However, day trading poses an issue related to Trade Settlement. Trade Settlement transfers stock to the buyer’s account and cash to the seller’s account. Typically, it takes 2-3 business days.

If the Trade Settlement takes 2-3 days, the ownership issue occurs. In Islam, someone cannot make a trade on the things they do not possess. Prophet Muhammad (peace be upon him) prohibits selling the unpossessed good, saying:

Do not sell what is not with you.” (Ahmad, Abu Dawood, An-Nasa’i, At-Tirmidhi and Ibn Majah on the authority of Hakeem ibn Hizam)

Before addressing the ownership issue in day trading, there are two kinds of ownership; constructive ownership and physical ownership. Constructive ownership is control over the asset without having its physical control. For example, when buying stocks, the buyer bears the full risks of ownership in terms of profit or loss when the transaction is made, even if the transaction has not been settled. Thus, the buying transaction in the first place has established constructive ownership.

Regarding selling stock before receiving the stock certificate, Syaikh Taqi Usmani considers that this is permissible because the transaction has established the ownership of the share rather than the delivery of the certificate. In this case, the share ownership is legally passed from the seller to the buyer upon completion of the transaction; it would be permissible to sell the shares before their delivery.

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