After a ton of research, we’ve compiled a step by step guide to better assist you in making the right investment without scarfing your halal lifestyle.
Many people in the muslim community are intimidated by investing in the stock market because of the fear of the unknown. People living in North America or in the west have this idea that it is haram to purchase stocks.
That is not the truth though. Yes, investing in the stock market is not so black and white. However there are steps that can be taken to filter out haram stocks. It will require some level of effort on your end. There are some apps and programs that make halal investing easy which is covered in step 6.
Investing in the stock market is halal. However, not all companies listed on the stock market are Halal. Here are 7 steps to determine whether a stock is Halal or not:
1. Find Out If The Company Is Halal Or Haram
2. Invest In A Socially Responsible and Conscious Company
3. Remember the 33% Debt Rule
4. Cash Holdings of A Company Ought To Be Less Than 33%
5. Only 5% Of Haram Revenue is Permissible
6. Use Investment Services That Offer Halal Stocks & ETFs
7. Do More Research
7 Steps To Finding Halal Stocks
Follow these seven steps to make halal investing much easier
Step 1: Find Out If The Company Is Halal Or Haram
The first step is the easiest step. Companies that engage in haram activities (Such as the production of recreation THC weed, alcohol, etc) are also haram to invest in. Why you may ask. Well, when you’re investing or buying a share in a company, you’re essentially a partial owner. This means that you’re backing up the business in their activities and promoting their initiative by literally investing in them.
Here’s a list of common haram Industries you ought to be aware of:
|Industry||Why it’s Haram|
|Interest Based Companies||Interest is haram because it is classified as Riba under Islamic Law. This is because it is understood to be exploitive. Furthermore, it’s seen as a way that increases the wealth gap and Riba capitalizes on the poor which is unjust.|
|Alcohol||Consumption of alcohol is forbidden in Islam because it is an intoxicant.|
|Tobacco||Consuming it is unhealthy and promoting the sale of it is considered haram.|
|Pork||Consumption of swine (pork) is forbidden in Islam.|
|Gambling||Gambling makes a person rely on accidents, luck and wishful thinking for his/her earnings, instead of hard work, the sweat of his brow and paying respect to the ways prescribed by Allah (source).|
|Weapons||Productions of weapons of mass destruction, what the west refers to as collateral damage, is considered the killing of innocents per Islam, and it’s forbidden. Therefore, sharia forbids the production of WMD (source) and investing in them means you’re promoting the production of WMD.|
|Adult Film||Engaging in this industry is haram, let alone promoting and investing in it.|
|Cloning||Our interpretation is that it is considered playing with the creation of God.|
There are definitely more industries than the ones above that are considered haram. However if a particular company is not so black and white to you, always consult a sheikh and do your research.
Halal Stocks List
Here’s a list of Halal Certified Stocks (source) that you may be interest in:
|Symbol||Stock Name||Where To Buy|
|DD||DuPont de Nemours Inc||Wealth|
|XOM||Exxon Mobil Corp.||Wealth|
|MRK||Merck & Co Inc||Wealth|
|APD||Air Products & Chemicals Inc.||Wealth|
|RDS/B||Royal Dutch Shell Plc – ADR||Wealth|
|ADI||Analog Devices Inc.||Wealth|
|TJX||TJX Companies, Inc.||Wealth|
|PG||Procter & Gamble Co.||Wealth|
|SNN||Smith & Nephew plc||Wealth|
|TEL||TE Connectivity Ltd||Wealth|
|ASML||New York Shares||Wealth|
|CHA||China Telecom Corporation||Wealth|
|CHL||China Mobile Limited||Wealth|
|BHP||BHP Group Limited||Wealth|
|NSC||Norfolk Southern Corp.||Wealth|
|EMR||Emerson Electric Co.||Wealth|
|JNJ||Johnson & Johnson||Wealth|
|ADP||Automatic Data Processing Inc.||Wealth|
|MDLZ||Mondelez International Inc. |
|RDS/A||Royal Dutch Shell Plc – ADR |
|ETN||Eaton Corporation plc||Wealth|
|BABA||Alibaba Group Holding Ltd||Wealth|
|CHU||China Unicom Hong Kong Ltd||Wealth|
|BBL||BHP Group Plc||Wealth|
|TXN||Texas Instruments Inc.||Wealth|
|SNP||China Petroleum & Chemical Corp||Wealth|
|LLY||Lilly(Eli) & Co||Wealth|
|PTR||PetroChina Co. Ltd.||Wealth|
|RIO||Rio Tinto plc||Wealth|
|NKE||Nike, Inc. (Class B)||Wealth|
Keep reading if the stock you’re thinking of buying is not in the list above.
Step 2: Invest In A Socially Responsible and Conscious Company
Filtering between haram and halal company is a fairly straightforward step. However, checking a company’s social stance and ethics is another thing to keep in mind.
This step ought to be taken with a grain of salt, we’re not suggesting that you go to a company’s factory plant and analyze every detail. However, it is advised that you do your homework and check if the company is not engaging in activities such as forced labour or causing detrimental damage to society (i.e oil companies that pollute an entire town causing many health and social issues etc).
Remember that when you’re investing in a company, you’re also investing in their morals and values. If a company is not aligned with your values as a Muslim, then you may want to reconsider purchasing that stock.
Step 3: Remember The 33% Debt Rule
Take a look at a company’s balance sheet to determine if they’re running purely out of debt. This is because if a company is dealing with so much debt, you’re more than likely helping them with their interest-based loans.
According to Shariah Investing screening (source), the level of debt that is permissible in a company to invest in is 33%. Islamic scholars came about this number from multiple references in the Quran stating that one-third is a lot.
When looking at the classifying 33% debt, here’s what you need to keep in mind (source):
- Long-term interest-bearing debt as disclosed by the company’s management
- Short-term interest-bearing debt as disclosed by the company’s management
- Current portion of long-term interest-bearing debt as disclosed by the management
- Interest-bearing short-term liabilities such as overdrafts, bridge loans, etc.
Step 4: Cash Holdings of A Company Ought To Be Less Than 33%
According to Islamicly Shariah Compliant stocks (source), a company ought to have less than 33% of Accounts receivable and interest bearing securities. This is based on a 36 month average. Here’s are the exact points they pay attention to when classifying a stock as halal in regards to cash.
- Cash in hand
- Cash in current accounts
- Cash Deposits
- Term Deposits
- Short-term interest based securities
- Marketable securities
- Short-term investments held for sale/trading
- Government bonds (if classified as short-term investments)
- Investments in mutual funds, other equity funds held for sale/trading
Islamic Investments are excluded from this list. For the entire list of financial ratios of halal stocks, check out their screening criteria here.
The rationale here is that if you invest in companies holding too much cash, it becomes suspicious and that company may be classified as a shell company or a money laundering organization that has a face of a company.
Step 5: Only 5% Of Haram Revenue is Permissible
You may be thinking, how on earth can you invest in a company with any haram revenue! Islamic scholars set this number because if no percentage of haram revenue was permitted, that would limit muslims to almost no stocks to invest in.
Furthermore, and this is our opinion, the 5% rule acts as a safeguard for the unknown. Say for example, you were to invest in a grocery chain like Walmart, their main purpose is not to sell pork but to sell everyday groceries. However, if you didn’t know that a small portion of their revenue comes from pork then this 5% rule acts as a safe guard against that.
Step 6: Use Investment Services That Offer Halal Stocks & ETFs
There are many investment services that allow you to invest in Halal Stocks without you having to do the work. For example there are apps out there such as ZOYA or Islamically that have already screened a large list of stocks and only offer Halal stocks.
Alternatively, if you’re looking to save time, what you can do is invest in Halal Equity Trust Funds (ETFs). An exchange-traded fund is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges (source). We only mention this because we invest in halal mutual funds ourselves.
The way it works is you basically place X amount of money and the platform invests it in a pool of stocks that are halal certified.
How do you guarantee that your money is invested in halal certified stocks? What we do is use Wealthsimple. They invest your money in stocks that comply with islamic law. They take into account the financial ratios we mentioned above and more. All investments are screened by a third-party committee of Shariah scholars. Therefore you can be certain that they’re not investing in haram industries such as gambling, weaponry, tobacco etc.
If you want to invest in a pool of stocks, and diversify your portfolio of halal stock investments, check out Wealthsimple.
Since Wealthsimple is the only stock trading platform we use, that’s what we’re recommending!
Step 7: Do More Research
If you’re not investing in a halal ETF or mutual fund and are looking at a brand new company, always do your due diligence and research the company.
Follow the step above and read what people and news agencies are saying about the company. Read their About Us page and learn more about the activities of the company. This is especially important when analyzing a new company or a new publicly traded stock.
Picking stocks does not have to be complicated, following these basic 7 steps will help you filter out the obvious haram industries and allow you to invest in the right stocks. While the screening process may take some time if you’re looking at a particular stock, it is 100% worth it if you’re trying to maintain your halal lifestyle.
We personally recommend using a halal ETF like Wealthsimple because it takes out the screening process and allows you to invest in a diverse range of halal stocks. This is important to growing your wealth.
Oh you’re still here? Check out our recent post, is cryptocurrency halal!