Last Updated on 15th July 2022
Someone asked Hazrat Amirul Momineen, Khalifatul Masih Vaa for guidance on whether short selling was halal or haram.
In his letter dated 16 May 2021, Huzooraa provided the following guidance:
“In essence, short selling is seen as an easy way to make quick money, which involves someone [the investor] borrowing some shares from brokers [or lenders], selling them at higher prices on the market, then buying them back from the market once their value has fallen and eventually returning them to the brokers. As a result, they earn a share of the profits and pay a share of it to the brokers as commission.
“Just as Islam has guided man in every sphere of life, it has also guided him to take an honest and transparent approach in business and to interact in straightforward and unambiguous terms. The Holy Prophetsa taught caution in matters of trade to such an extent that [he said] if there is any defect in your goods, do not hide it; rather, explicitly inform the customer of such a defect. (Sahih Muslim, Kitab al-Iman, Babu Man Ghash-shana fa Laisa Minna) [He instructed to] give full measure and not reduce it in any way, and not to sell something on until one has first taken possession of it (Sahih al-Bukhari, Kitab al-Buyu‘, Babu l-Kayli ‘ala l-Bai‘ wa l-Mu‘ti). Therefore, every business should be conducted after thorough research so that one does not get deceived or deceives another person.
“In the short-selling business, the buyer is prone to be deceived both at the company level and individually. Shares that are about to drop in value are sold with the intention that a few days later when the value of these shares has dropped, they will be bought back cheaply and returned to the original lender. In other words, despite knowing that the price of these shares will fall in a few days, these shares are sold to the buyer while keeping him in the dark.
“Moreover, among the various trades in the stock market, the short-selling business is in a sense a form of gambling. Therefore, sometimes the short sellers have to suffer huge losses instead of profits, as happened in the case of GameStop’s shares some time ago.
“Thus, in light of the teachings of Islam, it is the duty of a believing trader to ensure that he is neither deceived nor to deceive others, but to achieve financial gains by doing honest and transparent business while ensuring that his Lord is pleased with him.”
(Note: The above answer intends to give the correct Islamic viewpoint on short selling only. It does not constitute legal or financial advice. – The Editor, Al Hakam)