Full Lecture Transcript (Cleaned)
The Question — 0:00
Brother Irfan from New Jersey emails and asks: is it permissible to short sell stocks or not?
What Is Short Selling? — 0:35
A short sale is a market transaction in which the investor borrows shares from a broker and then sells the borrowed shares. The broker lends you shares for a fee — for example, "I'll lend you 100 shares of Tesla, but you have to pay me for lending this to you, and you guarantee me that you're going to pay me back the value that it is right now."
Why would somebody do this? Because the anticipation is that the stock is going to decline in value. The buyer will wait for the price to go down to the desired amount, then purchase the shares he borrowed, return them to the stockbroker, and keep the profit.
The bottom line is: you are borrowing stocks from a broker, hoping the value goes down. When it does, you sell the stocks, purchase back the shares, return them to the original owner, and keep the difference as profit.
Why Short Selling Is Prohibited — 2:18
There are actually multiple problems:
1. Selling What You Do Not Own (Primary Issue) — 2:23
The biggest issue is that you are selling something that you do not own. Our Prophet (sallallahu alayhi wa sallam) said in a famous hadith which is a principle of Islamic law: "Do not sell what you do not possess." You are selling the stock of somebody who has lent it to you — you don't own that stock. This clearly contradicts this explicit hadith.
2. Potential Riba (Interest) — 2:48
Some scholars have added that there might be some riba (interest-based issues) involved, because when the person lends you his stock, you have to pay a fee, and some scholars say that fee is ribawi (interest-bearing).
3. Element of Gambling — 3:04
Some scholars also say there's an element of gambling taking place.
The second and third issues are not as critical — we can find ways around those that are not as problematic. But clearly the first issue is highly problematic because you are selling a stock that you do not own.
The Risks of Short Selling — 3:31
Imagine borrowing $1,000 worth of stock, paying $20 to borrow it, then making a profit. You give the money back, pay the $20 fee, and ideally you've made maybe $100 — so your net profit is $80. You have basically transacted with things that did not belong to you.
But imagine if the price didn't go down — it went up. What are you going to do? You have to give that back, and that is going to come from your own pocket.
The Sharia's Approach — 4:10
In our Sharia, transactions are meant to be done with what you own. We try to minimize all of these dangerous areas where problems can occur. When you study these things in detail, you are really opening up a Pandora's box. It is something that is problematic, and especially if you have that gambling syndrome, you're going to want to do more, take riskier positions, and get into more and more problems. The Sharia aims to minimize these types of issues and close the doors for potential losses.
Therefore, generally speaking, the default position of the councils that I have come across — and this is the vast majority position — is that it is not allowed to short sell in the stock market and to engage in this type of transaction. And Allah knows best.