Updated: Jul 17
There is somewhere between 3.5-3.8 million Muslims in the United States, according to Pew Research. Yet, many Muslims struggle with basic financial concepts, mainly due to the lack of transparency, language barriers, and the veneer of rib'a (interest) in financial products. This post is aimed at helping Muslims understand the basic things about finance, financial products, and why they need to get started now.
Most financial products can be categorized along their "asset class", which are equities (stocks), fixed income (bonds), currencies (US Dollar, Euro, etc.), and commodities (oil, gold, etc.).
Stock are generally permissible according to most scholars (including American Muslim Jurists Association) because they simply represent ownership in a business or resource. However, many services exist, such as IdealRatings and Zoya, which help filter out impermissible stocks (such as those in haram industries like alcoholic beverages or companies that make their revenues from interest). While there is some differences in opinion on how to filter (for example, most filters also apply a debt limit), most of the filters work the same. At Wahdy Capital, we created our own custom filter to find halal companies, called Borsa Global Equities.
Bonds (fixed income) are generally impermissible due to their interest-bearing nature. Bonds should be seen as securitized (tradeable) loans and are issued by corporations, governments, and other entities.
Currencies represent money and are generally permissible, though trading in currencies has some potential issues.
Commodities, like oil and gold, are permissible themselves though trading in them often requires derivative contracts (futures), which embed significant financial risk.
Preferred shares fall under equities (stocks), as do sukuk ("Islamic bonds")
What about funds?
Funds are pooled investment vehicles that invests in a strategy, replicates an index (list of securities), or a combination of the two. Mutual funds are very common ways to own stocks, while exchange traded funds are mainly used to invest in an index. There are important differences between the two. However, their permissibility is dependent upon the asset they trade or track. For example, a mutual fund that invests in stocks might be halal, but one that invests in both stocks and bonds may not be. It is important to speak to a financial advisor or specialist about this so that you are more informed about the product you are interested in.
We provide financial advisory services and you can reach out to us here.
How Do You Invest in These?
Investing in these products may require specific accounts.
Stocks: you can generally buy stocks through any brokerage, such as Robinhood, Charles Schwab, or Etrade. Buying stocks directly makes sense when you have done some research on the company and have enough time to monitor your position.
Currencies: many brokerages now offer currency investing or management.
Commodities: most brokerages do not offer "spot" trading (cash) in commodities, but do offer futures contracts on certain commodities.
Understanding investment accounts can be tedious but we have a simple guide to help you. Accounts are typically classified by their tax status. All accounts, by their nature, are halal.
Brokerage accounts, also called a taxable account, is an account you can open with any securities broker. These accounts allow you to buy stocks. The money you invest in your stocks is after-tax (this means you already paid taxes on the money), and the investment return you receive will be taxed. There are different rules for short-term trades and long-term trades (over 1 year), which can have an important consequence on your income taxes.
Individual Retirement Accounts, also called IRA, come in two different flavors: Traditional or Roth. Traditional IRAs are "pre-tax", which means you have not paid taxes on the money you invest in. The returns grow "tax-deferred", which means you pay no taxes until you start to withdraw money from the account. Roth IRAs differ in that they are post-tax (you paid taxes on the money already) and grow tax-free. IRAs are very popular ways to save for retirement. We offer a financial advisory service aimed at helping investors utilize and manage these types of accounts. Click here to learn more.
401(k) / 403(b) are employer (or government) sponsored retirement accounts, with rules similar to IRAs. A key difference is that the amount you can contribute is often 3-4x greater than the IRA limits. Another key consideration is that many employers limit the kinds of funds or investments offered through the 401(k) / 403(b) plan. Working with a financial advisor can help you take advantage of your plan and make sure you are investing in halal options.
529(b) accounts are special college savings accounts that are sponsored by states. They can provide a similar, tax-deferred, benefit for savers planning for college (for themselves or their children).
There are other accounts too, such as savings accounts, product-specific accounts (a mutual fund or insurance account), health savings accounts, and more. It is important to understand their benefits and tax status before using them.
What Should I Know About the Market?
When people refer to the market, what they really mean is the stock market. There are stock markets in many countries around the world, but the largest are in the United States, China, Japan, and Europe. Stock markets are an important part of the local and international economy, as they help companies raise capital from shareholders and pay them (dividends).
The return from stocks comes from capital gains and dividend yields. Capital gains is an increase (or decrease) in the price of the share. Dividends is a portion of the profits paid out to shareholders.
The biggest drivers of capital gains (rising prices) are: improving company earnings, interest rates, and the long-term growth expectation of the company. For dividends, improving cash flow is key to rising payments.
What Makes a Good Stock?
"Good" stocks means you think their price will grow faster than the average stock. Good stocks tend to be in industries that are seeing a positive economic or industry situation, are companies winning market share from competitors, and have competent management teams.
The best way to track the performance of a stock is to read its last couple of earnings releases.
Did they beat estimates? (Good if they did, bad if not) Are they attributing their performance to company-specific issues? (Good if they are, bad if not)
You can also learn more about the company by reading its Investor Relations website. Finally, reading the 10-k (Annual filing) and 10-Q (quarterly filing) can give you the details you need to assess the company and its performance.
Here are some tips to finding good stocks:
Don't buy a stock just because everyone else is! "Crowding" in stocks is a real threat to your bottom line.
Avoid holding more than 10% of your portfolio in one stock.