FINANCE

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​Islamic Derivatives – What is Short Selling?
  • Definition:
    • Short selling = selling an asset you do not own with the intention of buying it later at a lower price


  • How it works (simple steps):
    1. A trader sells a commodity/asset at the current market price
    2. The trader does not actually own the asset at that time
    3. Later, the trader buys it back at a lower price
    4. Profit = difference between selling price and buying price


  • Example:
    • Sell a stock at $100 (without owning it)
    • Later buy it at $80
    • Profit = $20


  • Why people do it:
    • To profit from falling prices
    • Common in financial markets like stocks and futures


Shari’ah Perspective
  • Main issue:
    • Selling something not owned or possessed
  • Violates key Islamic principle:
    • “Do not sell what you do not own”


  • Related concerns:
    • Involves uncertainty (Gharar)
    • May include speculation similar to Maisir
    • Ownership transfer is not valid at time of sale


Key takeaway:
  • Short selling = selling first, owning later
  • Generally considered not permissible in Islamic finance because:
    • No ownership
    • High uncertainty
    • Speculative nature

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