Stocks

Do I have to pay Zakat on my stocks and shares?

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zakat on stocks

Do I have to pay Zakat on my stocks and shares?

Answer:

If you own stock in a company (or shares as they are called) then to determine their liability for Zakat you should look at the investment strategy you are using.

  • If you are using them for a long term investment (something you plan to hold for a year or more) then if they are more than Nisab,
    • A – If the company does not have any assets other than the dividends, then you will pay Zakat on the dividends distributed by those stocks (shares) when paid,
    • B – If the company holds assets (cash, receivables, inventory) then you will pay Zakat on the book value / net asset value as well as the dividends.
  • If you are an active trader, or have an active portfolio in a mutual fund, then you will pay Zakat yearly on the market value of the stock (share) or the portfolio, as well as the dividends.
  • If you sell these stocks (shares) during the year, you will add the amount received from sale to your liquid assets and pay Zakat according to general rules of Zakat.

This is the method prescribed the Fiqh Academy of the OIC and is generally prescribed by most scholars who are specialists in the field. There are other opinions, but we will cover those in a more extensive article.

Passive Vs. Active Investing

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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)

index_fund

Are Bulls and Bears Halal?

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It seems that one of the favorite questions Muslims like to ask about anything seems to be “Is it Halal?” When investing, there are two types of animals that you need to be aware of. Not to eat, but to understand what these two animals represent. Inevitably we expect a comment below asking if they are permissible to eat, but that’s for another site.

Bull Markets

Yearly in Pamplona, Spain there is a festival in which bulls are released into the streets to transport them from the off-site corrals where they are kept. The bulls used in this festival are also those that are used later in the day in the afternoon bullfight. While in the streets, young men jump in front of the bulls to prove their bravado. The Bulls lunge at the participants, thrusting its horns upward trying to toss the target into the air. A “Bull Market” is one that spikes upward, the bull being a metaphor for where the market is headed. So when the market trends upward, it’s a Bull Market.

Bull markets can be very profitable, with more investors entering the market to trade because of the upward trend. Continue reading

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