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Permissibility Status Of Earnings By Trading Indices On Funded Account
Assalamualaikum
US100 (Nasdaq-100) and US500 (S&P 500) indices clearly include companies involved in haram activities and interest-based businesses, so investing directly in these indices to earn profit is not permissible.
However, there are proprietary trading firms that provide funded accounts to traders after they pass an evaluation. In this setup:
1)The trader does not invest their own capital.
2)The trading capital belongs entirely to the institution.
3)The trader is paid a fixed percentage (e.g., 80–90%) of the profit generated as performance-based compensation.
4)Losses are borne by the institution, not the trader (beyond risk limits).
The trader’s role is similar to providing a service/skill (trading) rather than investing money.
Question:
Is the income earned by the trader in this arrangement halal, considering that:
The underlying instrument traded is an index containing haram companies, and
The trader is compensated for performance, not ownership or investment in the index itself?
How should this be classified in Islamic jurisprudence:
as ujrah (wages for skill), mudarabah, or something impermissible due to the nature of the underlying asset and contract?
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12 Replies
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Permissibility Status Of Earnings By Trading Indices On Funded Account
updated 6 months, 1 week ago
3 Members
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12
Replies
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This form of earning is problematic for the following reasons:
1. The trader is effectively enabling the trading firm to profit from investments in non‑permissible (haram) businesses by contributing his skills and expertise.
2. Based on the details provided, it appears that the trader’s compensation is drawn from the same investment‑return pool generated through companies involved in impermissible activities.
If no fully Shariah‑compliant indices are available, the trader should opt for those in which the majority of investments are halal and only a small portion is objectionable. It is preferable that the minor portion of income attributable to haram activities be given away in charity rather than consumed.
I would also request Dr. Irfan Shahzad Sahab ( @Irfan76 ) to share his valuable insight on this matter.
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If you think that the trade is done in haram activities, the services provided, the profit, and the commission earned from it are not halal.
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I would like to clarify that online prop firms do not involve real investment in indices. Their trading model is based on CFDs (Contracts for Difference), which function differently from actual index investment.For clarity, the CFD structure used by prop firms is as follows:No real money enters the marketNeither the trader’s money nor the firm’s money is invested in the actual index, exchange, or underlying companies.No ownership of index or sharesThe trader does not buy, sell, or own any part of the index or its constituent companies.Trading is purely on price movementProfit or loss is determined only by predicting whether the price moves up or down. Settlement is based on price difference only.Internal settlement with the firmThe contract is between the trader and the prop firm (or broker). The firm may hedge externally or may not, but the trader’s trade itself never reaches the real market.Nature similar to futures-style contractsCFDs resemble futures in the sense that there is no delivery of assets, only cash settlement based on price difference.Given this structure, my questions are:If no real investment is made in indices or companies, and no ownership exists, does the ruling related to “investment in haram companies” still apply?
From a Shariah perspective, are CFDs permissible or impermissible.
Jazakallah
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If there is nothing real is involved, it is dubious and dubious trade is not allowed.
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You mentioned that this type of trading is dubious because nothing real is involved. Could you please clarify which specific Shariah principles make it dubious?Is the dubiety due to lack of underlying asset, absence of ownership/delivery, cash-settlement based on price difference, or its resemblance to qimaar (gambling) or gharar?A brief explanation of the exact reason would help in understanding the ruling better.
Jazakallah
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Shariah does not call something dubious. We have to tell if something is dubious, then one needs to avoid it.
You said that no real asset is involved, no ownership is there, which makes it dubious.
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The hadith “Do not sell what you do not possess” was said at a time when trade was mostly in physical goods, fraud risk was high, and securities were not well-regulated. Today, in financial trading, we trade company stocks, currencies, or indices, not physical goods, and the risk of fraud is minimal.Does this hadith still apply in modern financial markets, or is it limited to physical goods?In safe CFDs (Contracts for Difference), the position ends with the contract, and profit/loss depends only on price movement, not on a specific condition being true. Does this make CFDs permissible?Does zero-sum nature, intention to trade ethically, or the absence of harm to others affect the ruling?
Jazakallah
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Possession then was a means to ensure that the trade was not a fraud. Now, when other assurances are there, it is not necessary to insist on physical possession.
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Sir, traders analyze an asset and decide whether the price will go up or down, then open a position based on their analysis and risk tolerance. Brokers allow retail traders to control positions much larger than their actual capital through leverage. For example, if I have $10 and use 10x leverage, I can control a position worth $100, and profit or loss is calculated on that $100.If I predict that the price of a halal company like Microsoft will go down and open a sell position, I profit if the price moves in my favor, and I incur a loss if it moves against me. In leveraged positions, the broker lends the extra capital—in this case, $90—and will forcefully close the position if my losses exceed my initial $10 to protect themselves.CFDs are zero-sum: my profit comes from the losses of the broker or other traders whose price predictions go against mine. I did not own any Microsoft shares; I earned profit purely from its price movement.
Jazakallah
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This seems to me someting like gambling. @Umer25 may reflect some light on its nature.
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If there is no element of deceit or unfairness, then a transaction cannot be considered prohibited merely due to the absence of physical possession or ownership. The permissibility of such arrangements should primarily be determined by the parties directly involved or by qualified professionals in the field. Based on available information, Contracts for Difference (CFDs) are not inherently prohibited.
Speculation is distinct from gambling. Speculative trading is generally a short-term strategy that relies on technical and sentiment analysis, aiming to benefit from price fluctuations within a limited timeframe (much like how market forces determine prices in a general market economy). In principle, all forms of trade are permissible (halal) except those that involve immorality or injustice. As long as such aspects are avoided, speculative trading is not objectionable.
Gambling, by contrast, is based purely on chance and typically involves two or more participants, where one party’s gain is directly tied to another party’s loss. In such cases, the winning party has no legitimate moral right to the money obtained, which makes gambling fundamentally different from speculative trading.
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A game of chance in which you gain by guessing without reciprocating is gambling, no matter if your gain does not cause loss to another, it is still gambling.
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