Is online trading halal?

Islam is the second largest religion globally, with about 2 billion followers worldwide. It provides a strict moral framework that guides its believers in living virtuous lives.  Many Muslims worry that engaging in financial activities, especially trading, will violate fundamental Islamic values, especially those related to interest and unethical practices.

Due to this concern, there is now more interest in trading options that comply with Sharia law and Islamic beliefs. In accordance with Sharia law, many Muslims actively trade, working to increase their wealth for themselves, their families and their communities. They do this by following established principles that support ethical behaviour, honesty and fairness. In this article, we’ll explore whether Islamic teachings consider trading halal or haram.

What is Islamic trading?

In contrast to conventional trading, Islamic trading strictly avoids activities that include interest (riba), excessive uncertainty (gharar), and gambling and alcohol, all of which are forbidden. So how do traders achieve this in practice? And which forms of trading are considered halal in Islam?

Muslim traders can comply with these ethical guidelines through Islamic trading accounts. Islamic trading accounts do not apply interest-bearing overnight swap fees in contrast to conventional trading accounts which apply such charges. Islamic accounts offer alternatives such as upfront fees or commission-based structures to ensure compliance with Shariah principles.

These Islamic trading principles encourage Muslims to pursue their trading objectives while adhering to their religious beliefs, promoting ethical and responsible business in global markets.

Is trading halal or haram?

Islam supports lawful and ethical trading, seeing it as an honourable activity when it follows Sharia principles. It is considered halal (permissible) as long as it follows Islamic principles. Trading is considered haram only when it involves elements that Islam clearly prohibits.

These are riba (interest) on loans or transactions, which is considered unfair; gharar (excessive uncertainty), which is banned to ensure transparency and fairness; and maisir (gambling or ‘games of chance’), which is banned because it is speculative and has the potential to harm traders.

Islamic law does not permit trading in sectors like gambling and alcohol. These industries are not Sharia compliant and are considered harmful.

Islamic scholars collaborate closely with Sharia advisory boards to promote ethical participation in financial markets. They offer advice, examine financial markets, and update rulings. This helps Muslims trade in ways that are consistent with their religious beliefs.  

Scholars issue fatwas (Islamic rulings) that guide institutions to create Sharia- compliant accounts. These rulings encourage Muslims to practice ethically and in line with their faith.

Halal trading rules

Islamic trading accounts do not charge or earn interest (riba), including overnight swap fees. An Islamic trading account makes sure that traders avoid haram investments and do not invest in businesses that are not permitted in Islam. These include businesses that deal with gambling, alcohol, or unethical businesses.

Islamic trading accounts avoid speculative practices like gharar (excessive uncertainty) and maisir (gambling), making sure there is transparency and fairness. Every involves real assets and is based on mutual agreement.

By avoiding excessive leveraging, which carries a significant risk, traders can ensure they engage in ethical practices. To minimise risk and avoid investing in non-compliant companies, it is also important to carry out thorough research and due diligence.

Islamic laws governing financial instruments

Spot forex trading, involving the instant exchange of currencies, is widely accepted in Islamic finance as long as it complies with the principles of avoiding interest (riba) and guarantees prompt settlement. This means engaging in transactions where currency exchange takes place on the spot without any delay or interest payments.

Buying stocks in companies that follow Islamic principles is typically regarded as halal. This means choosing companies that adhere to ethical and Sharia-compliant practices and avoid sectors like alcohol, gambling, and pork.

Receiving dividends is allowed in Islam since they represent a share of the company’s profits. But earning from interest-bearing investments is not allowed. Investors should be careful with companies that have high debt ratios or earn through interest-based activities.

Several factors determine whether CFDs (Contracts for Difference) are allowed in Islam. According to some scholars, CFDs that are based on real assets and avoid interest and high-risk speculation are halal. Others argue that they are haram since they do not include physically owning the asset. To ensure that the CFD contract’s specific terms and conditions align with Islamic beliefs, it is crucial to review them so that they are compliant with Islamic principles.

CFDs that include interest (riba) payments or leverage that incurs interest are considered haram. To avoid riba, traders should carefully review the financial terms of any CFD to ensure full compliance with Sharia principles.

It is generally regarded that short-selling is not halal in any asset, including currencies, stocks, or CFDs, since it involves selling assets the trader does not own, which adds gharar and speculation. These practices conflict with the principles of transparency, ownership, and fairness that are central to Sharia-compliant trading.

Sharia law and day trading

There are differing views among Islamic scholars regarding day trading. Some scholars view all forms of day trading as haram, while others think it is halal, but only under specific conditions.

Why some scholars consider day trading haram

Day trading is entirely speculative and more like gambling. The long-term fundamentals of an asset are sometimes overlooked in favour of short-term price movements.

Day trading has the characteristics of gharar, which is forbidden in Islamic finance due to the high level of risk, especially when using leverage.

Day trading does not contribute to actual economic growth. It prioritises short-term earnings over long-term, profitable investments.

Since day trading often involves the sale of assets one does not own, short selling isgenerally regarded by scholars as haram.

Why some scholars believe day trading is halal

Sharia does not specify how long an asset must be heldbefore it can be sold. Buying and selling on the same day is not prohibited.

By boosting market liquidity and contributing to efficient price discovery, day trading can help assets find their true market value.

Day trading is often conducted through regulated brokers or exchanges that guarantee fair pricing, clear contracts, and transparent trade execution.

Also relies on analysis, discipline, and strategic decision-making, it is not a game of chance.

Day trading differs from pure gambling in that it often monitors the value of underlying currencies or assets.

How to day trade while adhering to Sharia law

To ensure Sharia compliance in day trading, you must stay away from interest-based activities and focus on only halal assets. Sharia forex accounts are usually available from reputable, regulated brokers. Even if a Sharia forex account is not available, interest fees can be avoided by closing positions before the broker’s cut-off time for charging interest.

Traders should avoid companies engaging in haram activities like gambling, alcohol, or pork products, or interest-based finance. Instead, they should concentrate on halal assets like currencies or commodities such as gold or silver or stocks in industries that benefit society, such as automotive, manufacturing, or pharmaceuticals. Additionally, it is important to avoid short selling assets or stocks that you do not own, which is forbidden in Islamic finance.

Clause de non-responsabilité : This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.