Stock Market

Introduction

The stock market is the place where shares are brought and sold. The term stock is used to denote an investor’s ownership of a company so that an investor who buys a company’s stock becomes one of the company’s owners or a shareholder. The stock exchange is the market place where various forms of financial ownership of stocks, bonds, and other investments are bought and sold. The investors in the stock market range form individual stock investor to large stock investors. Stock Exchange is a business that provides facilities for the trading of securities and stocks. These are an important way for companies to raise capital for investment and at the same time give an opportunity for investors to share in a company’s profits.

In the early days of the stock exchange where traders meet face to face and sign deals with each others. There were lots of issues and scandals regarding the stock exchange. But nowadays stock exchanges are regulated by different institutions where the buying and selling of shares is usually done through a stockbroker. However some scholars say that the concept of stock market was existed during the life of Holy Prophet (PBUH) in the shape of Mudarabah which is similar to modern stock market. This buying and selling of shares is not limited to certain place where each shareholder has to gather and buy and sell; today people from all countries can buy and sell online with the help of these same stock brokers in just a couple of second.

BACKGROUNG OF STOCK EXCHANGE

In 1602 the Amsterdam Stock Exchange was created thus becoming the first official stock exchange. The Amsterdam Stock Exchange sells shares of the Dutch East India Company. By the end of 1700’s Amsterdam Stock Exchange and other stocks exchange were ready to work in France and England and America. The largest stock exchanges in the world are New York Stock Exchange (NYSE), American Stock Exchange (AMEX), The London Stock Exchange and the Hong Kong Stock Exchange.

Concept of partnership in Islamic schools

As we are discussing concept of stock market from Islamic perspective therefore we have to look the concept of partnership in Islamic schools. Different scholars from different schools have expressed their thought in different ways. Therefore each scholar has presented their own ideas and explains the different form of partnership. The following are the types of partnership as describe by the different schools of thoughts.

Sharikat-ul-Amwal (Stock Companies)

These are forms of partnership in which two or more partners agree to participate in business activities, each partner bring the specific amount of capital and will invest in the business. This type of partnership may be sub divided into two types; the first is called sharikat al-mufawadah, the second sharikat al-‘inan.

In sharikat al-‘inan the partners allow each other to act independently in making business decisions and agree to follow such decisions, whether made in the presence or absence of the partners who made them. Thus each partner has the combined capability to act both as a wakil (agent) and a kafil (surety) for the others.

A contract of the second category limits the ability of a partner in making business decisions; each acts as an agent and has to seek the approval of the other partners of his business decisions. Thus the first category (sharikat al-‘inan) becomes (sharikat mufawadah) if such important conditions as equal opportunity of partners’ shares and obligations are not allowed in the contract of mufawadah partnership.

Sharikat al-mufawadah is recognized by the Hanafī and Mālikī schools of Islamic jurisprudence, but is rejected by the Shāfi‘ī school, which recognizes, along with the Zahirī, Hanbalī and Ja‘farī schools sharikat al-‘inan only.

Sharikat-ul-Sanai

This type of partnership is normally concluded between tradesmen or craftsmen of the same or different trade or craft, where they agree to accept work assignments and to split the gains among themselves. This category could, in turn, be a mufawadah or an ‘inan partnership. This form of partnership has not been recognized by the Shafi‘ī, Zahirī and Ja‘farī schools of jurisprudence, but accepted by the Hanafī, Malikī and Hanbalī schools.

Sharikat-ul-Wujuh

Supporter of the Malikī and Hanafī schools of Islamic thought differ in their definition of this type of partnerships. The Malikis do not permit this type of partnership as known to them, where a man of high stature and good reputation would sell to an unknown person who is the capital owner. The Hanafis, however, see this form as partnership between two persons having no capital of their own, who undertake commercial activities using the maal (wealth, capital) of a third party, where the partners draw on their goodwill and reputation to purchase commodities on credit and sell the same in cash.

This form of partnership is recognized by the Hanafis and Hanbalis as mufawadah or ‘inan forms.

Mudarabah

This form of partnership involves payment of one partner (called rabb-ul-maal, capital owner) to another (called Mudarib, manager) to invest it in a commercial enterprise for an agreed common share in the profit realized.

It is known that the concept of a stock company according to modern world is different from that in the Islamic scholars have told; we find that a stock company, whether of the ‘inan or mufawadah type, depends on the partners who participate therein by contributing both wealth and work. This need of the contract of partnership once one of the partners chooses to assign his share to another person, unless the other partners choose to keep the partnership in business and work with the new partner. However, the modern idea of a stock company completely neglects its personal side and gives status to its financial side; it does not insist on that partners should know each other, nor does the contract of such a partnership come to an end once some of its partners choose to exit. These partners have nothing apart from their capital shares in the partnership, which determine their financial responsibilities and the number of votes they have in the annual meetings of the general assembly.

Early Muslim scholars did not separate the partnership from the partners, and thus did not make out an independent existence for the partnership aside from its partners, as it is the case in the modern joint stock company that has an independent financial and legal personality. Therefore, those scholars who allow to go the modern joint stock company as unlawful from a Sharī‘ah perspective could not find for it a legal basis in the tradition of the principles of Islamic jurisprudence. It has been particularly difficult to find such a legal basis due to the difficulty in meeting two basic legal conditions for the validity of the stock company contract, namely mutual consent among shareholders and legal capacity. As it is known, in such type of business organization there is no ‘offer and acceptance’, and the individual idea is dominant, where an individual becomes automatically a partner as soon as he acquires some stocks in the company.

Teaching of Islam regarding stock market

In a Shariā’h well-matched stock company, a stock represents a shareholder’s share in the company. Such stock is the document that gives the shareholder proof of his right to a chance in the company’s wealth comprising its paid-up capital, assets and retained profits. There are several types of socks: a common stock, which is subject to profit and loss, a preferred stock, which earns part of its share in the profits realized at a known pre-fixed rate and the loan stock, which earns its profit at a fixed rate of interest. The majority of contemporary Muslim scholars are in agreement on the permissibility of trading with common stocks, which are similar to the shares in a legal Mudarabah. They are in agreement as to keep out selling with the other two stocks.

There seems to be an agreement of view among contemporary Muslim scholars on the acceptability of exchanging common stocks through buying and selling transactions. However, purchase of a share or stock in a Shariā’h compatible stock company should not be viewed as an cut off commodity purchase transaction that is effected merely to satisfy a personal desire to own, consume or invest. A Shariā’h well-matched partnership in order to be valid should meet the condition of ‘niyyah’ (intention), which is one of the pillars of a partnership contract. This is explained by the fact that a Shariā’h well-matched partnership is not a mere formal contract as it is the case in straight law; it contains in its essence, at least from an ethical perspective, the element of personal sincerity and belief in the mission of the partnership and in the advantage of associating oneself, at the personal and financial levels, with its family of partners. This would guarantee the shareholder’s resolve and dedication to make the partnership successful and to help realize its profit-making and social goals.

A shareholder with such a deep faith and belief in the mission of the partnership would not listen to or act upon the rumours often spread by market brokers regarding the partnership’s financial future by at speed selling his shares.

The concept of ‘defensive right’ (Shufaah) as a license of the Shariā’h which could be used in formulating the articles of agreement if found to be in the interest of the joint stock company. This stockholders’ defensive right is recognized by Shariā’h; it gives them first priority to purchase new stock issues or the stocks of existing shareholders who would like to sell them.

‘Shufaah’ may be defined as the right of a shareholder to take away, through purchase, the share of his partner that has been assigned to a third party from the hand of such third party. This defensive right has many supportive evidences in the Prophet’s Sunnah, most famous among which is the tradition narrated by Jabir “The Prophet (PBUH) awarded shufaah right in things that have not been divided; once boundaries have been set, no right to shufaah is awarded” (unanimously accepted).

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