Before starting to invest, it's a good idea to take stock of the different investment options that exist. Men in suits refer to these as "asset classes", but just think of them as a menu of all the things you can invest in 🍣
Just like you'd check your options before buying something, it's important to review the investment options available to you before investing. This is useful for general knowledge, but it's also absolutely crucial to keep you on track.
See, knowing that you chose an option gives you the confidence boost to stay the course the next time you hear about some "brand new investment" option that you worry you're missing. Fear of missing out (or "FOMO") has driven many investors to the ground. Recognizing this as a risk, and dealing with it keeps you level headed, and helps you build long-term wealth like a flipping ninja 🥷
The Popular Two
Shares are essentially tiny pieces of a company (literally, like a 'share' of the company). When you buy a company's share, you become a part-owner of the company — and are now entitled to receive a portion of the profits that company distributes in the future (if any).
As you might have expected, buying shares is halal only if the company you're buying is considered halal. There are some obvious tells (e.g. a company that sells alcohol is obviously not halal), but the operations of most companies aren't so clear-cut. We'll discuss the different ways to assess if a company is halal or not in a future post.
It's also worth noting that there are multiple ways to buy shares, at different stages of a companies life. Most people know about the public markets (or 'stock exchange'), where shares of public companies are exchanged amongst buyers and sellers (like Google, Amazon or Tesla). However, you can also buy shares before a company becomes public (i.e. before it's listed on a stock exchange). These are known as 'private shares', an advanced topic we'll cover in a future post.
Fixed Income (Lending)
Another class of assets involves lending. Here, you lend money to a company, that promises to pay you back the amount you lent (plus interest) over a period of time.
These are traditionally known as 'bonds' or 'fixed income' — both obviously not halal because they involve the use of interest.
There's a workaround called "sukuk" that circumvents this restriction. Instead of lenders receiving interest, they pool their money to buy an asset that is then leased to the company. The company, overwhelmed by the generosity of the investors, pays them a monthly fee for using the asset. Eventually, it buys the asset outright at the end of the period, returning the original amount invested and a portion of the profit it earned from the use of this asset.
While many scholars consider Sukuk to be halal, an increasing number consider them to be just dressed up bonds - with steps added to circumvent the restriction around interest. In fact, fact sheets of popular Sukuk funds (like the Franklin Templeton Global Sukuk Fund) cite things like "coupon rates" and "yield to maturity" when describing the sukuk they hold — adding weight to this position.
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Beyond the big two, there's also a bunch of other things that are collectively lumped together under the "alternative investments" umbrella. Here's a quick run-down of the different options that are available to most people:
It doesn't get more traditional than real-estate. You buy an apartment or a house, and rent it out for a monthly amount, eventually (hopefully!) making back more than you paid in roughly 20 - 30 years. Boomers just eat this up, and it's mainly because it's tangible (plus they like the idea of owning their own homes).
And while buying a home may be the most common scenario, there are more creative ways to invest in real-estate. This includes things like Real-Estate investment funds, or REITs, where money is pool from investors and used to buy up a collection of properties, instead of just one. REITs are notoriously debt-ridden, and this is especially true for mortgage REITs — which is why it's rate to find a halal REIT in the western world.
Currencies (Forex) 💱
The Foreign Exchange (or 'FX') market is a financial market where one currency is exchanged for another — somewhat like the currency exchange store you're used to, but different in one crucial way:
The overwhelming majority of volume on the FX market (over 90%), is driven by speculation. While speculation itself is not sufficient to consider something haram, the fact that it creates risk with no corresponding value, and relies heavily on margin does. It is for these reasons that the majority of scholars consider FX trading for the purpose of speculation haram.
That said, there's nothing wrong with holding currency. We all hold some money on hand, for things like a taxi ride or to buy from the corner store. It's just another 'asset', and it's (usually) easy to exchange one currency for another. We can also use currencies to protect against risk. If I lived in Argentina, I'd probably want to keep most of my money (and the return from any investments) in USD — since the Argentine Peso has dropped so dramatically vs. the US Dollar.
Cryptocurrencies are similar to currencies, in that they are very liquid and represent some store of value. However, they vary in some ways. They aren't backed by anything (like gold or silver), they aren't regulated by any central authority, they aren't 'printed' by anyone.
Scholars don’t all agree on whether cryptocurrencies are considered halal or haram, with the moderate position appearing to be “it depends”. It depends on what cryptocurrency you’re talking about, whether it has any inherent utility, and whether it enables non-halal economic activity to take place.
Commodities are basic goods that can easily be exchanged for other goods of the same type. Think oil, copper, gold — even beef 🐮!
Metals can be traded through physically-backed ETFs. That means you can buy a 'share' of Gold through IAU, or a 'share' of Silver through SLV — and these shares represent their respective metals physically stored in a vault somewhere. There's little surprise then that such trades are viewed as being halal by most scholars
The challenge comes with other, less precious, commodities. These are too costly to physically store; instead what most traders do is exchange 'futures contracts' (see WEAT for an example of an ETF that trades wheat futures). These types of arrangements, according to the majority of Muslim scholars, are haram.
NFTs / Collectibles
Finally, there's a sort of miscellaneous category that I put all of the other things that don't quite fit the other classes we covered so far.
These are somewhat similar to commodities, but they aren't fungible (i.e. not equivalent in quality, so not easily exchangeable). These are collectibles like sneakers, watches and handbags. You may be surprised to hear that these things can be considered 'investments'; they can be! (presumably, so long as you don't overuse them).
Suffice to say that it's going to be much more difficult to buy/sell these items — due to limited inventory as well as storage costs.
The Bottom Line
In the post, we covered the different asset classes that you can invest in. Just remember: Not everyone needs to be invested in every single asset class (the same way you wouldn't order everything off the menu!).
In fact, it's often times not a good idea to be invested in every asset class — especially when you're investing a small amount of money. Some asset classes (e.g. venture capital / private equity) even have strict requirements that prevent most people from investing in them.
Most people will never invest outside the "equities" asset class, and that's completely fine! It's a massive market that very liquid and easily accessible. It's not going anywhere!