Leave it to Wall Street to figure out a way to profit from a falling stock. For those who do not understand here is how it works. Say an investor analyzes Intel and decides that all signs point to a decline in the stock price rather than an increase. Intel is trading at $40 a share, so the investor “BORROWS” shares of the stock at that price and immediately sells them. After the stock falls to maybe $30 a share, he buys it back on the open market to repay his debt. But since the price is lower, he pockets the difference – in this case $10 a share. (Of course, if the price goes up from his original price, the investor loses big time.)
This has always been a grey area for me. I know trading in stocks is Islamically (if that is the right word) correct as there is both profit or loss. If this is the argument you also have a probability of a loss when you short, but then you can also lose in gambling and that is not right. Is is right to make a profit on somebody else’s loss?
Intelligent answers please. I will also appreciate Ehsan’s (moderator) input as he mentioned that he shorts stocks.
I am no expert in islamic rulings on stock trading, but I am curious as to why you considered "short trading" as akin to "gambling".
To what I understand, gambling, is when you leave everything to chance (like toss of coin, or throwing darts). In stocks (short trading included), a reasonable investor will make a judgement call based on market conditions, forecast of future market conditions and company's managament and products etc. Now, this judgement call may be wrong or it may be right. Only time will tell.
But to me, it seems awefully close to normal trading of e.g. wheat. You buy stock, in the hopes that by the time you sell, the price will be higher so you can make a profit and earn your living. Whether you earn a profit because of price going up or down is only a matter of what sort of market products you are playing with, but as long as you trade based on intelligent information of future forecast, why is it similar to gambling?
Isn't it similar to buying and selling any commodity, where you pocket the difference because of difference in value due to value-add, time or distance?
You misunderstood. I was not saying that short selling and gambling are similar. The only reason I mentioned gambling was to say that gambling also has the probability of a loss so we cannot say that everything that has a chance of either a loss or profit is islamically correct. This is the argument given in case of interest, that since there is no chance of a loss it is not Islamic.
My biggest concern in shorting is making profit on somebody's loss.
As I said, I am no expert on islamic jurisprudence on stock matters… but having the possibility of profit or loss is just one factor which is considered to determine permissibility.
In any case, I found this explanation on the internet. I, personally, can’t vouch for its accuracy, but here you go: