The word Stock/Shares simply means a share in the ownership of the company. Stock/shares represents a claim on the company´s assets and earning. When you own a stock/share you own little bit of the company. The more stocks/shares you own the bigger your stake, and the more say you have.
Once you hold the stock of the company you will become the stock/shareholder of that particular company i.e. technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company.
Stock/Share brings money in to the company which they can invest for its growth, expansion and development.
Why issuing Share/Stocks?
Company to raise money so that they can invest in their businesses and help them grows.In a way the Company is willing to be part of a Joint holding or Partnership model than being in Debt and pay interest.
Once a company has issued the stock/shares they can be bought and sold on the stock/share market. The company may decide to issue more stock/shares in future to raise more money for expansion. This is called a rights issue.
Stock/share market works on the basic principle of market i.e. matching buyer and seller and is governed by the laws of supply and demand and all the companies listed on the stock market are grouped together into categories, according to what they do.
For example, Tata Motors and Mahindra & Mahindra are in the Automobile sector. This is to help investors compare similar companies more efficiently.
Types of stocks/shares
Common stock/Shares also referred to as common or ordinary stock/shares. When people talk about stocks/shares they are usually referring to this type. Common stock/shares gives voting right to it’s shareholders ,generally common stock/shareholders receive one vote per share to elect the company’s board of directors but one of the disadvantage of common share/share is that its stock/shareholder will not receive money until the creditors, bondholders and preferred stock/shareholders are paid.
Preferred stock/shares, sometimes called preferred shares, have priority over common stock in the distribution of dividends and assets Preferred stock represents some degree of ownership in a company but usually doesn’t come with the same voting rights. (This may vary depending on the company.) With preferred stock/shares, investors are usually guaranteed a fixed dividend forever.
Ownership shares issued by corporations and traded by investors include both common stock and preferred stock. While there are several ways in which the two types of stock differ, the most significant way, from an Islamic legal point of view, is that preferred stocks guarantee the amount of the dividend.
Such a predetermined and guaranteed rate of return is prohibited for the reason that it may be classified as riba.
Thus, while an investor may share the risks of ownership with other investors, the preferred status of the preferred stock means that there is extra compensation for the owner for which the owner has not had to pay. This, in simplified terms, amounts to riba al fadl.
As a general rule, then, Muslim investors may trade only in common stock.
Investment in Stocks/Shares-The WealthCity Way:
We along with our advisory ie Amanah Research conduct extensive research on stocks/shares listed in Indian stock/share markets. A more accurate and transparent approach to Shariah compliance is ensured by Screening Stocks/shares against a clear set of guiding principles issued by Islamic Fiqh Academy, AAOIFI, Shariah Scholars like who do not deal in the ones involved in Haraam (prohibited) businesses like production and sales of alcohol, tobacco, obscene entertainment and interest based banking / finance companies.
Financial parameters like Debt Equity Ratios, Accounts Receivable, etc are verified on a free float Market Capitalization methodology on a list of more than 6000 companies listed in Indian Stock/share Markets ie BSE and NSE, making the resultant Shariah Stock/share List concise and comprehensive, with a list of companies with good financials and ethical business practices.
The Shariah Stock/share list is send to all the customers, so that they can invest in Shariah Compliant stocks/shares. We also conduct research into the various companies and the research reports along with recommendations are also mailed to the clients on a regular basis.