Investing in stocks offers a promising path to financial growth, but for Muslims who adhere to Islamic principles, the investing must be halal and inline with the Shariah. In this beginner’s guide, we’ll navigate the fundamentals of stock and ETF investing with a focus on the halal approach. By following these steps, you can embark on your journey towards financial prosperity while ensuring your investments remain aligned with Islamic values.
1. Understanding what stocks are:
At the core of stock investing lies the notion of owning a piece of a company. Stocks represent your share of ownership, and every time you acquire a stock, you’re essentially becoming a co-owner of that company. When opting for the halal way of stock investing, it’s crucial to ensure that the companies you invest in are compliant with Islamic principles.
2. Define Investment Goals:
Before diving into the realm of halal stock and ETF investing, it’s vital to establish clear financial objectives. Are you saving for retirement, a new home, kids’ education, or other life goals? A good plan will assist you in making informed decisions and help you achieve your goals.
Write down your short-term and long-term goals. Make a plan as to how much you need to save every month, and how long will it take for you to reach your goal (by saving and growing it with investments). You can download Excel templates to help you in this regard.
3. Before you start investing:
Prior to starting investing into halal stocks and ETFs, it’s important to build a strong financial base. This includes paying off debt, creating an emergency fund to cover at least 6 months of your needs, and maintaining a solid budget. A disciplined budget will help you organize your finances. Once you have completed this, you can then start taking out money every month for investing. This is crucial because investing is for the long term.
If you start investing without having a good financial base and plan, you may realize soon that you need the money you have invested. Selling your investments in a short period of time is terrible. You may lose money and moreover you will end up paying unnecessarily in fees. This is why it is important to get your finances sorted before you start investing.
4. Understand Shariah Compliance:
Familiarize yourself with the fundamental concepts of the stock market, particularly in the context of halal investing. Understand how shariah compliance works and how to check if a stock is halal. Know that you may have to pay Zakat on long-term investments and purify any non-halal portions of your investments.
In a nutshell, there are non-halal activities that happen in the stock market. For example, buying and selling based on margin, which is mostly interest-based lending and is extremely risky. There is also Options and Derivatives, which are not permitted.
Stick to buying and selling of common shares of halal companies and/or ETFs.
6. Reduce Risk and Embrace Diversification:
Diversification is equally vital in investing. Diversify your investments across various companies, industries, and asset classes to minimize risk. Halal ETFs and index funds inherently offer this diversification.
7. The Advantages of ETF Investing:
Consider the benefits of investing in Exchange-Traded Funds (ETFs), especially if you are just getting started or don’t have time to analyze and pick individual companies. These investment vehicles offer:
– Diversification: ETFs provide instant diversification by spreading your money into a portfolio of various stocks. This helps spread risk and is a key component of a halal investment strategy.
– Lower Costs: ETFs often have lower fees compared to actively managed funds. This can translate into higher returns over the long term.
– Liquidity: ETFs are traded on stock exchanges just like individual stocks, offering ease of trading and liquidity. You can buy and sell them throughout the trading day.
SPUS and HLAL are two popular Shariah compliant ETFs that invest into Shariah compliant companies in the US market.
8. Choosing the Right Investment Account:
Select a reputable online brokerage offering access to stocks, including ETFs. Use DRIP (Dividend Re-Investing Program) to reinvest the dividends you earn. This can multiply your investments at a much faster rate.
8. Start with Prudence:
Begin with an investment amount that you’re comfortable with. Many beginners opt for low-cost halal index funds or ETFs to build a diversified portfolio. Have a plan to add investment funds on a regular basis, like weekly or monthly, for example.
9. Engaging in Thorough Research:
Prior to investing in specific companies or ETFs, conduct research on their financial health and Shariah compliance. Confirm their adherence to Shariah standards. You can use Muslim Xchange to check if a company is Shariah compliant. Learn how to read financial statements of companies and do a fundamental analysis. It is important to know if the price you are buying a business is really worth it.
10. Harnessing the Power of Patience:
Halal stock and ETF investing is a long-term endeavor. Prepare to retain your investments for extended periods like at least 10-20 years and avoid being swayed by short-term market fluctuations.
11. Monitoring and Maintaining Balance:
Regularly assess your halal investment portfolio, including your ETF holdings, to ensure it aligns with your financial goals. Adjust your investments as your objectives evolve over time.
12. Perpetual Learning:
Continue expanding your knowledge about halal investing through books, courses, and reliable financial educational sources. Education remains the cornerstone of successful investing. Learn about Value investing and Dividend Growth investing.
Investing in stocks and ETFs the halal way offers both financial rewards and Shariah compliance. By mastering the essentials, establishing clear goals, and making informed choices, you can embark on your halal investment journey with unwavering confidence.
Keep in mind the value of long-term investments, portfolio diversification, and the virtue of patience. These principles will guide you on your path to achieving your financial aspirations while upholding your Islamic beliefs.
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