Dear Hadi,
Dear Reader,
Thank you for your question. For other readers who may not know what speculative trading is, here’s a brief overview. Generally speaking, speculative trading involves buying or selling financial assets in order to profit from short-term price fluctuations. This is in contrast to focusing on long-term holding or fundamental value of the assets. The aim of speculative trading is a quick turnaround and while it can offer high returns, it also runs the risk of significant losses.
Now, on to your question about Islamic restrictions on speculative trading. To determine if speculative trading is allowed in Islam, we need to consider a few factors: ownership; gharar (excessive uncertainty); and maysir (gambling).
Let’s start with ownership. In Islam, you are generally required to own an asset before selling it. So, some forms of speculative trading, such as short-selling stocks, would violate this principle. Short-selling involves “borrowing” stocks you don’t actually own, and selling them at the current prices, in the hopes of buying them back at a lower price later. The gain (or loss) comes solely from guessing the fluctuation in price, rather than from actually selling something you own, or creating value. If the speculative trading involves assets you don’t actually own, we would recommend staying away from it.
Next, let’s look at gharar. Most scholars believe that transactions involving excessive uncertainty are prohibited. If the speculative trade falls into this category, then it’s best to be avoided. Again, short-term guessing on price fluctuations, especially if one doesn’t even own the underlying asset, could fall into this category. Also in this category would be activities such as leveraged day-trading, where one is “borrowing” funds so that they can buy or sell more assets than their own actual capital would allow. So, for example, if you have $1000 and 10x leverage, you would be able to make trades as if you had $10,000. This means that if the asset’s price goes up, your gains are magnified 10 times, but if the price goes down, you run the risk of losing all your capital. This sort of speculative trading carries extreme risk and you are trading with assets that you don’t actually own, and thus, we would recommend avoiding it.
Similarly, if the speculative trading resembles gambling i.e. the outcome is really based on chance rather than actual economic activity, then it’s best avoided. For example, in a bull (generally up trending) market, a trader may diversify assets, investing in multiple stocks, knowing that some will go up and some will go down, but “betting” that in the short term, his gains will outweigh his losses. This is basically just a gamble, like betting on several horses at the track.
On the other hand, some may argue that some forms of speculative trading involve significant technical analysis and thus the guesswork is limited. To our knowledge, however, the stock market has been stubbornly resistant to accurate mathematical prediction. Also, if there is still no underlying ownership of the assets, this would be problematic.
To summarize, if the speculative trade involves assets you don’t actually own, and the trading is either excessively uncertain or leveraged in such a way as to resemble gambling, our opinion, and God knows best, is that it would be restricted by Islam. Islam is in no way ascetic, and making money lawfully is one of God’s blessings, but there is always a sense that the commercial activity in which one is engaged should be legitimate business with a socially positive value. We are concerned that this is not the ethos that governs speculative trading. Once again, however, we do not give fatwas, but just share our thoughts for your consideration, and God knows best.
In peace.