Understanding Islamic Investment

What is generally known as "Islamic Investing" is actually investing in stock market the Shariah way.

Shariah is the code of law derived from the Koran and from the teachings and example of Prophet Mohammed.

Shariah (literally meaning "way" or "path") refers to the "way" or "path" Muslims should follow.

I found that Islamic investing is actually a very sound investing philosophy.

It brings discipline,sense and ethics in trading by questioning some of the core criterea we all have been blindly following.

Any new trader must study Islamic investing before getting knee deep in the gushing river of trading.

Islamic Investment Criteria:-

* Investing is prohibited in an industry or company indulging in business that is prohibited or abhorred in Islam?

Besides banking and finance, investing is prohibited in a business involving alcoholic beverages, pork and pork products, tobacco products, gambling, lottery, pornography and adult oriented material, prostitution and drugs etc.

* Cannot borrow on interest to Invest.

* As per Islamic investing, one cannot enter the market as speculator but only as investor.

* As per Shariah scholars, ideally there should be no interest-based debt on the company you invest in, but if debt financing is more than 33% of the company's capital, investing in that company is certainly prohibited.

* Under Islamic investing guidelines, ideally no income should come from interest-related sources. However, companies whose income from interest forms less than 5-10% of its total income, it can be considered for investing.

* In Islamic trading, one has to be very careful about company's monetary assets. As per Shariah scholars, accounts receivables and liquid assets have to be below 45% for the investment to be permissible.

* Day trading is prohibited in Islamic trading as it has little to do with actual investing and is considered closer to gambling.

* Margin Trading is buying stocks using money loaned from the broker. Interest is paid for this loan, and therefore it is prohibited in Islamic trading.

* Derivatives - Options and Futures is purchasing the right to buy or sell at a future date for a fixed price. Not exercising the option results in the investor paying the option fee. Therefore, majority of scholars are of the opinion that Futures trading is not permitted in Islam.

* Short Selling - Short selling is borrowing a stock from the brokerage firm and selling it. From shariah point of view you cannot sell what you do not possess.

If one can learn investing under Islamic wisdom, it will be one of the toughest, ethical and effective training.