I often get ideas for my monthly "Islamic Finance News" column from emailed questions via my website. However a recent column was sparked by a rather surprising conversation with a personal friend who thought that investing in shares was just a form of gambling.
I decided to write an explanation which became my April column. You can read it below.
Every so often, family members and friends make the comment that buying shares is a form of gambling. However, last week I was very surprised to find the question being asked by someone who should know better — a friend who is a chartered accountant!
Gambling (in Arabic “Maysir”) is prohibited in Islam. That is the reason I don’t gamble, even when it looks like a “sure fire bet” such as the money I could have made in 1997 by predicting the Labour Party’s majority in that year’s general election.
However, what is the essence of gambling, which distinguishes it from other types of risk? For example, every time you drive your car from home to work, you might be killed in a car accident. You might even say that rush-hour driving is a “gamble with your life.” However, it is clearly not gambling as prohibited by Islam.
In my view, the defining characteristic of gambling is that it involves the unnecessary and artificial creation of risk.
The purest example is the game of roulette. When you stand beside a roulette table, there is absolutely no need to put down a stake. Choosing to put down a stake which could be lost or conversely multiplied in your favour is a decision to create risk-based outcomes (depending upon the spin of the wheel) which are simply not needed.
Conversely, when you risk your life driving from home to work, you are doing so because you need to get to work.
With that preliminary background, we can now consider what happens when you buy a share in a stock market listed company. You now own a very small percentage of the entire company. If the company makes a profit and chooses to distribute part of that profit to its shareholders, you will receive a cash dividend on your shares.
Even if the company is currently paying no dividends by retaining all its profits (as for example the American company Apple Inc did for many decades) those retained profits are being reinvested to expand the business and you hope to receive dividends in future years.
There are risks associated with your share ownership. The company may run its business so badly that it never pays a dividend. Indeed, the business may go downhill with the company becoming insolvent and being liquidated, with a total loss of your shareholding.
If you decide to sell your shares, you may receive more than you paid to buy them or you may receive less.
However, all of these risks and uncertainties arise from the inherent uncertainty of life when you own a small percentage of the real business being conducted by the company. They are not risks that have been artificially created purely to create variability of outcomes, unlike the situation above with the game of roulette.
Accordingly, although the buying of shares results in outcomes for you which are inherently uncertain, this has none of the qualities of gambling. Buying shares is categorically not gambling!
Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.