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Islamic Financial Trading

You have some money saved up and you are thinking about investing that money somewhere to make profit off it.

So you start to explore your options and you stumble upon the vast trading options offered by financial markets. Trading in financial markets is a lucrative option because the returns are usually instant and significant.

However, Forex trading and trading in the stock markets is a controversial topic. People are concerned about whether investing and trading in these markets is halal or haram.

There are many rulings about the final verdict and every school of thought rules in the favour or against of it, based on their particular teachings. But the ruling against the trading activities that involves interest is definitely certain.

Is trading in shares and stock market halal?

A popular consensus amongst the scholars from major school of thoughts is that investing in shares per se is not haram. Buying shares of a company means that you own a percentage in that business and you are deemed as a partner of profit and loss, of that percentage.

However, one important thing to note here is that the individual has to make sure that the company he is investing in does not deal in unislamic activities. Riba or making profit in the form of interest is prohibited in Islam. Therefore, trading the stocks of the companies in which interest is integrated in the business models is regarded as haram.

What if a company deals in partially unislamic activities?

For instance, a pharmaceutical company that deals in the trading of alcohol. General ruling for such cases is that if a company deals in only an insignificant fraction of unisalmic activities (let’s say less than 10%) then it is perfectly fine to invest in buying the shares of that company.

It all comes down to common sense and your knowledge of the company’s dealings. Investing in the shares of a company that solely deals in alcoholic beverages is not allowed. On the contrary, a pharmaceutical company that deals with alcohol but not as a final product is allowed.

Is Forex trading halal?

Before dwelling into the discussion of the halal or haram nature of Forex trading it is important to understand what the term implies.

Forex trading means trading in foreign currencies in the foreign exchange market. It is a very lucrative industry that promises significant returns. And apparently there seems nothing wrong with simply trading currencies.

However, to understand the rulings of Islam on the subject, it is imperative to look at the intricacies of the process.

Forex trading is deemed permissible under following conditions:

  • The cost of transaction should be remitted immediately
  • The trading should be instantaneous.
  • Accruing interest on the trade is considered unislamic therefore the transaction should be free of interest

Usually currency trading takes place with the help of a financial institution as an intermediary, usually banks. And banks are involved in usurious interest, which is prohibited in Islam. Therefore, Forex trading under such conditions is not permissible.

Shariah law

If you want to invest in financial markets but are also concerned about following Shariah law, UFX online trading platform is the best trading option available. It provides Islamic accounts for trading Forex and CFDs. UFX is in compliance with the Shariah Law because it is a broker and not a bank. Therefore, this eliminates the chances of ‘usury’ or interest involved activities.

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Why did the pound “flash crash”?

Several theories have emerged about why the British pound tumbled from about $1.26 against the US dollar to about $1.18 in just two minutes on Friday morning.

We may never know the precise reason despite the Bank of England looking into the cause. Foreign exchange markets are complex. There are many trading systems operating in the market across time zones and there’s no single collector or provider information.

Forex in Asia

The crash happened just after midnight London time, when liquidity in forex markets is typically low. Forex trading in Asia is spread across many key centres like Tokyo, Hong Kong, Singapore and Sydney. But low liquidity itself isn’t a cause for a so-called “flash crash”.

Fat Finger

It could be down to a so-called “fat-finger” trade where a person types in a wrong number in an order. In a market increasingly dominated by algorithmic trading done by computers it could also have been caused by a glitch in a programme (‘algo’ for short). These sorts of glitches have happened before, notably in 2010 in the US stock market. If it was a fat finger by a person at a bank, we should have found out fairly quickly. Counter-parties acknowledge the error and wipe the trades out. If it’s an algo glitch, then we may never find out.

Other Explanations

There are other possible explanations that are often trotted out when market moves can’t be explained. Including a build up of stop loss orders at a certain point and when those are triggered there’s a large subsequent move.

Solutions

There’s not a lot traders can do about flash crashes. They can’t be predicted, and thankfully they’re rare. But sterling markets have been highly volatile ever since the UK voted to exit the EU. Traders need to consider mechanisms like guaranteed stops. It also pays to use common sense – the pound is now highly susceptible to the kind of surprise headlines (‘tape bombs’ to use the lingo) that can cause rapid movements in prices. As well as using guaranteed stops, it makes sense from both a financial and a psychological approach, to use smaller position sizes. FX markets are volatile at the best of times, but now news flow is combining with low liquidity (compared to previous years) to make this asset an even more volatile place.

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