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Halal stocks are stocks in companies that employ halal practices. Under the Islamic precepts of Shariah, investors are allowed to invest money in the stock market if certain criteria are met. If a person invests in halal stocks, any money he or she makes from these investments is also considered to be halal. It is similar to the joint venture concept called Musharakah in halal loan approaches. When a buyer acquires shares in a business, he or she becomes a partner in it because he or she is now a shareholder.
Stocks can only be considered halal if the company passes both qualitative and quantitative screenings to gauge if it is truly Shariah compliant. The factors that are screened for halal stocks determination are the business the company is engaged in, percentage of interest related income, and trading practices. Investors who are planning to invest in halal stocks are expected to apply certain screening procedures to ensure that their investments will be 100% halal. The first thing an investor screens is the company's primary source of income.
Businesses are labeled unlawful, or haram, if they engage in gambling, gaming, or pornography. Companies that deal with pork, alcohol, or media that promote gossip columns are also considered haram. Tobacco products, lotteries, and any business that involves drugs are also prohibited. Typical businesses that are considered halal are those that involve textiles, computers, energy, and telecommunications.
These types of halal stocks are favored by investors wishing to comply with Islamic law. If a company deals with haram products at all, the revenues from those products should be less than 5%. In that case, the company is classified as having a core business connected with other materials, and investing in this company is allowed.
Factors like debt-to-asset ratios, interest-related income, and monetary assets are also screened. Shariah financial guides believe that the liquid assets and accounts receivables should not exceed 45% of the total assets of the company. In this case, the accounts receivables are calculated as the sum of long-term receivables and current receivables. The debt-to-asset ratio of the company is used to determine its financial soundness. If debt financing is the basis for more than 33% of its capital, the company disqualifies itself for investment.
Regarding interest, the company isn't allowed to borrow on interest to finance its investments if it wants to have halal stocks. Under Shariah principles, the company should not make any income from interest-related sources. Some scholars, however, have relaxed this guideline a little. Stock buyers can invest in a company if its interest-related income is less than 5%. Shariah scholars also do not permit investors to speculate; stock trading practices such as day trading, margin trading, short selling, and option trading are prohibited in accordance with the Shariah.