Many scholars say day trading is halal – but there are differing views and it’s an ongoing debate. In this article, we’ll discuss:
- What is day trading?
- Examples.
- Is it halal? – Some discussion plus our thoughts.
It’s a skilled profession. Let’s break that down. It is “skilled” – so it takes time to learn and isn’t something you master overnight (or indeed something everyone is cut out for). It is a “profession” – so you can’t dabble with day-trading. You have to approach it with the same seriousness as with your profession.
Day traders look for stocks that move in a predictable way, which are usually traded in one day and are not held overnight.
- The key is that the trade is usually intraday and does not extend much beyond a day or two at the latest.
- Some traders only trade on the day and close out all positions before the market closes – i.e., these day traders don’t care about what happens to the market after it closes.
Traders look for a stock “In Play”. These are stocks that have a high reward/risk opportunity intraday. There are many factors that make a stock a stock “In Play”, such as:
- Breaking news
- A stock that has had a 2% change before the market opening
- A merger and acquisition announcement.
Day trader stocks also include stocks that:
- Have a high relative volume – so is trading higher than normal, independent of their sector and the overall market
- Are volatile stocks (that can move 10-1000%(!) each day)
- Have a low float (i.e., a small number of shares)
So big companies such as Facebook or Apple which have a large number of shares are out of the question, as their daily price doesn’t usually move very much.
There are many different strategies that a day trader can use – we won’t go into these here.
A common misconception with day trading is that it is pretty straightforward and you have a 50% chance per trade of investing in a winner. After all, stock can only go up or down, right?
There is a lot more to it than that.
If it were that simple, there’d be many more successful traders. But trading comes down to: experience, mindset, discipline, connection speed, access to powerful algorithms, access to market information, access to deep datasets, and much more.
You are trading against some of the smartest people in the world who likely have a faster connection than you and more data points. Everyone- from professionals in large firms (institutional traders) to novices (retail traders)- want to keep their money and take yours.
Quite aside from the debate on the sharia-compliance of day trading, anyone considering day-trading should think multiple times before embarking on this perilous journey. It is not for the faint-hearted – and most fail.
Examples/Contrasts
To understand day trading further, we’ll look at an example and a contrast. This includes:
- Short-selling
- Swing trading
a) Selling Short
Short selling is a type of day-trading and allows traders to profit from a falling stock price.
If prices are dropping, then day traders sell short to make a profit. The trader will
- Borrow shares from a broker (e.g., showing -10 shares in his account),
- Sells the shares (in the hope the price will go lower),
- Then buys them back at a lower price,
- Returns the shares to the broker,
- The trader then keeps the profit.
This works because the broker wants their shares back, not your money.
Brokers allow you to sell their stocks at a drop as they prefer to hold their position for the long term. They don’t care about short-term ups and downs. They will gain extra income by loaning their shares to short sellers and charging interest.
The risks here are that if a company goes bankrupt then you’ll owe the broker money.
b) Day Trading v Swing Trading
If you often hold the stock overnight or for a few days, it’s not day trading anymore – it is now swing trading.
Unlike day trading, in swing trading, the trade is usually has completed before the selling (meaning you own the share). In a day trade, you do not acquire full ownership when you purchase the share.
- We will go more into this in the next section. However, briefly, stocks complete the transaction at T+2. This means you can’t take stock into your beneficial ownership and possession until two days after the transaction has gone through.
The style and mindset of investing between a day trader and swing trader is very different.
- Day traders think short-term (minutes, seconds) – they’re not long-term investors. They are often trading on the basis of technical chart signals.
- Swing traders think medium-term (days, weeks, months). They are somewhat informed by technical analysis but also informed by news and short-term news.
The type of stocks that you would day trade and swing trade are different:
- Swing traders – generally look for more solid companies that won’t lose their value overnight.
- Day traders – will trade anything, including companies that won’t exist the next day (i.e., go bankrupt). This is because they have no concern about what happens after the market closes.
So, to conclude, swing traders:
- Hold stock for a longer period of time.
- Buy and sell with full ownership (as they’ll typically hold for more than 2 days).
- Think longer term (days and weeks rather than minutes).
- Look for slightly more solid, viable companies.
- Take slightly less risk.
Is it halal?
Day trading is generally seen as permissible – here’s a fatwa link. However, there are scholars who do disagree with this.
Also note: the majority of contemporary scholars are of the view that share trading is permitted, regardless of whether the intention is capital gain or to receive the annual dividend – here’s a fatwa link.
But the specific issue with day trading is whether you are buying and selling without ownership. Let’s dig into this further.
What’s all this ownership stuff about?
Day trading involves trading in stocks and shares where you are selling the stock before the stock actually settles.
How does this happen?
Stocks complete the transaction at T+2. This means the stock is not in your ownership and possession until two business days after the transaction has gone through.
- The “T” stands for the transaction date.
- +2 means it takes two business days after the transaction date for the settlement or the transfer of money and share ownership to take place. The shares are usually transferred from one broker to your broker. So, share certificates never physically end up in your possession, but that’s fine as here the important point is when it gets transferred to your broker and he now holds the share “beneficially” for you. So, it’s yours, but he is holding it for you. But he doesn’t hold it for you until T+2.
In Islam, it’s required that you have ownership (whether legal or beneficial) before a sale. It has been narrated that the Prophet Muhammad ﷺ “Do not sell that which you do not possess.” By not owning a possession, the seller has no power to guarantee it and hand it over to the purchaser, making it a gamble. Therefore, Islam may have some issues with day trading.
Remember – unlike day trading, in swing trading, the trade has usually completed before the selling so there are fewer issues with this style of investing.
Option Contract in Islamic Finance
An option is a contract that gives the buyer the right, but not the obligation, to purchase or to sell a specific quantity of an asset for a set price at a specific date in the future. In exchange for this right, the buyer pays a price, known as a premium, to the seller. Two basic kinds of options exist a call option and a put option. The call option gives the buyer the right to buy the asset by a certain date for a specific price. The put option gives the buyer the right to sell the asset by a certain date in the future for a specific price.
For example, if A believes that the stock of company X is going to increase in value. A can either pay full price and buy the stocks, or pay a fraction of the price (i.e. premium) and buy call options. If the price increases A can benefit either way. If the stock decreases in value, A can let options lapse. Thus, A does not bear any loss more than the premium. This is an example of a call option (right to buy).
For an example of a put option, imagine B is worried that the value of her stock is going to decrease. She can either sell her stocks or buys put options. If the price decreases, she can sell her stocks for the set price; her only cost is the premium. If the price increases, she can simply let options lapse.
These are examples of simple options. To hedge, their risks businesses often combine put options and call options. Combined options are commonly used to hedge against currency premiums in combined options can be set up in a way so they cancel each other. For example, if C is worried that the fluctuation in the value of USSD may affect its ability to perform a contract, C can hedge her risk by buying a combined option—basically, she will buy both put and call options. If the value of USSD increases the profit she makes from the put options—being able to buy for the less than market price—will set off her loss from the call options, and vice versa.
The IFG view
We are sympathetic to day trading but are aware of the ongoing discussion. One of our IFG Forum muftis, Mufti Faraz Adam, is currently looking into this and we await to hear back. You can read our detailed view on our Fatwa Forum: Is Day Trading stocks and shares gambling?
The two reasons why we are sympathetic to day trading is that day trading is a necessary part of stock investing for the overall market to work and the T+2 model is seen as a market custom. If we have got comfortable with a bit of leniency around the debt element and haram income element to allow Muslims to participate in the market in the first place, it seems odd to then deny them access to one of the biggest styles of investing in this market due to a technicality.
The other reason is that the reason why the rule “do not sell that which you do not possess” came about in the first place is to avoid dispute (at least according to Shaykh Ibn Taymiyyah and Ibn Al Qayyim).
Given the relatively insignificant number of times, a company will actually go bust during the two-day period after you have bought it, the risk of a dispute arising in that remote case is, well, remote. Furthermore, even in situations like that, there are rules to govern what happens and the exchange will enforce these.
There are also clear views by scholars that it is permissible. IFG is sympathetic to these views (but do not take this as a fatwa).
Some IFG audience members have talked about the difficulty of screening and trading these types of shares. In one day or a few hours, a share can change from sharia to non-sharia compliant. We’ve written about how to screen halal stocks and we have an exclusive sharia screening course.
Conclusion
Share trading and day trading is seen as permissible by many – though there are differing views and ongoing research.
Ask yourself: do you want to trade with your money or do you want to invest with it? If it’s to invest, then don’t day trade.
Day trading is hard – it’s not a get-rich-quick scheme. It requires a lot of education and practice. But, it can be a lucrative way of making money. On average it takes six to eight months to make money. For others, it can be much longer or shorter. Don’t trade alone – it’s difficult. You can connect and find like-minded Muslims on IFG and on our Stocks Telegram group.
You also need around £100k to start off with as you will want to only invest 1-2% of your full pot in each trade, but that 1-2% needs to be significant enough to make a few hundred pounds a day for this to make a living.
Practice using simulators. Why? Well, first you need to know what you are doing. But secondly, because of hotkeys. It’s a necessary skill for day traders to be quick using their keyboards to remove the need to use a mouse and keyboard. That’s how quickly you need to work. Some simulators will charge you. However, if you’re serious then it’s worth it.
You can learn how to screen shares on the stock market for sharia compliance here.
If you don’t want to day trade, we’d recommend:
- Using funds or robo-advisory platforms to take the headache out of investing and let them just do it for you. You can compare all the halal investment funds on our comparison page here (just filter for “stocks & shares”).
- If you’re keen to get more hands-on (I know we personally often are) then learn how to screen stocks in a halal way, invest for the long-term, and pick high-quality and revenue-generating businesses. This type of investing doesn’t require as much data, isn’t as reliant on timing and fast internet connections and full-time professional focus. This is the type of investing we usually do. Here’s an article about how Ibrahim made 108% over the last 4 years.
If you want to learn more about investing, check our Halal Investing 101 Guides.