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In the context of risks, trading and gambling are both regarded as speculative risks.In both trading and gambling, one can profit or lose.However, there are key differences which make gambling and trading inherently different. Some of the differences from a Shariah perspective are:
1) Gambling is considered to be the staking of wealth by two or more parties where the winner wins all and the loser loses all.In other words, gambling is winning at the expense of anotherâs loss. Whereas in trades and investments, counter-parties and shareholders (ordinary shares not preference shares) collectively gain or collectively lose.
2) Gambling does not involve ownership of underlying assets.It is merely staking your wealth.Whereas trading and investing demands ownership of underlying assets.
3) Payouts or 'profits' in gambling is pegged upon the occurrence of an uncertain event; usually in a âyes or noâ proposition or a binary stake. The outcome and profit is a result of one of the propositions occurring. In investments, profit is not pegged upon the occurrence of an uncertain event, rather, there are multiple factorsresulting in a profit yield, primarily, the performance of the underlying asset relative to various economic, political, social and managerial factors.
4) Gambling involves transfer of ownership of oneâs wealth conditionally on the occurrence of an uncertain event.This is prohibited in Shariah. In investments and trading, uncertainty and risk is not in the transfer of ownership, rather, one purchases and invests in underlying assets in the very beginning.The investor entertains asset-ownership risk from the very outset but bears investment risk in the interim.
5) In gambling, loss occurs as a result of chancing incorrectly. It a win or lose proposition. In investments, loss is as a result of bad performance of the underlying assets.It is not a simple win or lose proposition.
6) Gambling has gharar (gross uncertainty) as the transfer of ownership is suspended on an uncertain event. Investments have ghurm (risk) and dhaman (liability) as a result of the transfer of ownership from the very beginning.
Professor Sami al-Suwailem describes the difference between gambling and investments in the Theory of Gharar in his paper on âHedging in Islamic Financeâ.The following is a paraphrase of his arguments:
Game is used to denote a for-profit exchange among two or more agents, whereby agentsâ payoff are uncertain at the beginning of the game.
Games can be classified according to the sum of playersâ playoff into three categories: positive-sum, zero-sum or mixed-sum.
1.Positive-sum game are games in which players have common interests, and thus they gain together or lose together.An example of a positive-sum game is partnership or musharakah.Since each partner contributes capital and labour, both would gain if the project succeeds and both would lose if it fails.The size of the payoffs need not be equal for the two parties.But they must gain together and lose together, although the contribution of each might not be equal.
2.Zero-sum game are games in which one party gains and the other loses.Gambling is the most obvious example.One player wins and the expense of the other.Again, the magnitudes of gain and loss need not be equal.The term âzero-sumâ indicates that the interests of players are in direct opposition.
3.Mixed games are games that include both sorts of outcomes; the zero-sum game as well as the positive-sum outcome.These games allow for mutual gain, but also imply the possibility of conflict of interest.Examples of mixed-games include share-cropping/Muzaraâah, Juâalah and âurbun.
In a zero-sum game, one party gains at the expense of the other.It is a pure transfer of wealth for no counter-value.Since each party is seeking profits not donations, it becomes therefore a sort of âeating wealth for nothingâ, strictly condemned in the Qurâan.Further, a zero-sum game is a game with direct conflict of interests, which represents the source of enmity that accounts for the prohibition of maysir or gambling in the Qurâan: âSatan only wants to plant enmity and hatred among you through wine and maysir.â (Qurâan 6:91)
Characteristics of zero-sum games:
1.Whatever one party gains is what the other loses.
2.Gains and losses in a zero-sum game are determined bilaterally â between the two parties of the contract.That is, an actual net transfer of wealth takes place at maturity from party to another, with no counter-value in exchange.
In conclusion, the above points are some of the reasons why investments and gambling are inherently different despite the outcome being uncertain for both.An investor speculates by taking ownership of assets and bears the risks of the assets.An investor profits as a result of the positive performance of the underlying assets for which he has assumed ownership risk.On the other hand, a gambler speculates by conditionally staking wealth on an uncertain event without taking ownership of any asset.A gambler profits if his bet materialises and as a result takes his share and the share of the loser as profit.
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Reply 4: - You are essentially arguing that as long as there are multiple uncertain events as opposed to a single uncertain event, then this legitimises stock trading and investing. After all, every factor which you state is an uncertain event in itself and outside the control of the normal investor or trader. This is akin to arguing that placing a bet on Arsenal to win the Premier league before the start of the season is not gambling as it relies on multiple factors such as the players they sign in the transfer window, injuries to their players and opposition teams players, potential change of management etc.I can continue taking apart your points for another 10 posts but will leave it here for now.I would be very interested in hearing your counter arguments to my responses as this is a subject which I am yet to find a conclusive answer and am keen to do so.END OF REPLY.
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Marwan Nawaz
Procurement & Contracts Specialist - EPC Projects
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Reply 3:- Stock prices are significantly influenced by market sentiment, which can change rapidly based on news or events. This can lead to quick gains for some and immediate losses for others, as reactions to news can cause stock prices to fluctuate violently. Those who may have access to certain information in advance will gain at the direct expense of those that do not. This is no different to an owner laying his horse not to win as he knows that the horse is unwell. - Your argument that trading shares is not a zero sum game as shareholders collectively gain or collectively lose is deeply flawed and is akin to arguing that lottery syndicates are not gambling as all members of the syndicate collectively win or lose based on whether their numbers come up or not.3) Flawed argument that In investments, profit is not pegged upon the occurrence of an uncertain event, rather, there are multiple factors resulting in a profit yield, primarily, the performance of the underlying asset relative to various economic, political, social and managerial factors.Continued in Reply 4.....
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Marwan Nawaz
Procurement & Contracts Specialist - EPC Projects
3w
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Reply 2:- What you describe as "ownership" of an asset, is really just a speculative investment on how well the company performs, rather than a direct claim on its physical assets. Even where a company goes completely bust, ordinary shareholders are rarely the first in line to benefit from any physical assets the company may own.- To conclude this point, when you buy shares, what you're actually owning is a financial instrument, not a concrete piece of the companyâs infrastructure or its operations.2) Flawed assumption that gambling is winning at the expense of anotherâs loss whereas in trades and investments, counter-parties and shareholders collectively gain or collectively lose. - Traders often buy stocks not based on the company's intrinsic value but on anticipated market movements. If their speculation is wrong, another market participant who took the opposite position will profit. That's a zero sum game.- In markets for options and other derivatives, the zero-sum nature is even more apparent. For every contract that ends in a profit for the holder, there is an equivalent loss for the writer of the option.Continued in reply 3....
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Marwan Nawaz
Procurement & Contracts Specialist - EPC Projects
3w
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Reply 1:Salaam,This is a very interesting article on a subject upon which I have yet to find a conclusive answer.You put forward some very interesting points to support your overall argument, however, I remain unconvinced for the following reasons :1) Flawed assumption that investing or trading in stockmarket shares "demands ownership of the underlying asset":- When you buy shares, you're not purchasing a physical part of the company, such as a desk or a piece of machinery. Instead, you get a stock certificateâessentially a piece of paper. This is no different to a betting slip in a bookmaker. This piece piece of paper simply gives you a claim to its future performance (earnings) and is not a tangible asset. No company earnings are ever guaranteed or certain and therefore deems its occurrence an uncertain event.- Furthermore, the value of this paper can be diluted at any time. Companies can issue more shares, reducing the value of existing ones, effectively diminishing an individuals slice of the pie without their consent. One can argue that this is no different to inflation in the existing fiat monetory system, which in its current form is wholly against Islamic monetory rules.Continued in "Reply 2"....
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M. Sikander Azam Malik
University Topper | Gold Medalist | Senior Creative Designer | Branding | Logo Design | Brand Guide | print | Ui/Ux Designer | Interaction Design | Brochure | Video Editing | Motion Graphics | Campaign Design
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MA very helpful
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