Short Selling

Topics: Contract, Sales, Contract law Pages: 4 (1299 words) Published: March 31, 2013
Short selling
Short selling is a practice of selling a borrowed security that the seller does not necessarily own. Short sellers are generally betting that the price of security will go down, and assume that they will be able to lock-in a certain profit by buying the security at a lower price than the price at which they originally sold short.

Example of short selling
Short seller borrows the security for a given fee and sells it short on the market for Rs 40000. If tomorrow the price of security drops to Rs 38000, short seller could buy it back in order to return the security and lock a profit of 2000 (the price difference between 40000 and 38000), less the borrowing fee.

Islamic Point of View
Short selling is prohibited (Haram) from the Shariah perspective. Shariah scholars found several reasons behind which, short selling is considered haram, and the reasons are as follows:- 1- selling something you doesn’t own:-In Islamic transactions; to sell something you must first have the ownership of what is being sold or the subject of the sale. Therefore in order to sell a security, the security must be owned by the seller and not borrowed - which is the case in short selling. 2- Riba:-Short selling is associated with the conventional borrowing and lending system of securities which includes a series of interest-based charges for services, and interested payments on borrowed securities. And as we all know, charging interest on services and borrowed securities is considered as Riba. 3- Speculation: - Since short sellers are watching out for fluctuations in the markets, to sell the share at a higher price and buy it back at a lower price and pocket the difference. Speculation has been perceived negatively due to its resemblance with gambling. 4- Gharar/ Ghobun :- there is uncertainty in the contract and the buyer is also deceived. 5- unjust deeds

Hamish Jiddiya
Token money, down payment by a party intending to purchase certain goods who wishes to confirm...
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