Now that you know what a stock is in it most basic terms and what types of stocks you should avoid (remember the list of impermissible sectors) its now time to make a decision as to how you want to invest. First, do you want to open a brokerage account yourself, choose your own shares, then buy and sell? Most busy, career minded people do not so they opt for managed funds. Managed funds are run by experts. They select the investments that your money will be allocated to and are paid a premium for doing so. Some of them actively seek out investment opportunities, researching companies and pouring over their financials, then allocating your money to those stocks as they see fit for your risk profile. Others do what is call passive investing, and that is they simply track an index (like the S&P 500) or a basket of companies. Think of it this way: Active investing is like hiring a personal chef for a private meal, passive investing is like buying from the menu in a chain restaurant.
Which of these approaches is better? That is a highly debated topic right now. What you as a Muslim investor must be mindful of is this: If you use an active fund manager, make sure you are clear about the types of investments that you want your funds invested in. Enlist the services of an ethical advisor who can guide your fund manager when there is some ambiguity as to what to invest in.
If you use a passive investing method, through an index fund or similar, this is where it gets tricky. In our next post, we’ll talk about some of the things you need to look out for when investing in an index fund.
For more in this series, click below:
Building an Investment Strategy: 4 simple steps to get you started
The Anatomy of a Stock
Passive Vs. Active Investing (this article)
Index Funds: The Basics (forthcoming)
How to deal with Impermissible Earnings (forthcoming)