Our hard-earned money can lose value over time because of inflation. We can retain or increase the value of our money over time by making capital market investments. Additionally, we can invest our money so it can grow to a bigger sum in the future for a specific purpose. Stocks and bonds are two fundamental financial assets, each carrying its own advantages and drawbacks. Therefore, it is important that we know similarities and differences between them.

Stocks and their characteristics

Ownership: Purchasing stocks involves acquiring a stake of ownership in a company, allowing us to potentially profit from the company's growth and earnings. In other words, stocks’ investors become part owners of the company. Investors can sell their stocks to other investors to recover their money. However, the original sum invested is not returned to the investors by the company itself.

Returns: There are two sources of returns from investing in stocks. First, investing in stocks provides the opportunity for greater returns by benefiting from increases in the stock price which is known as the capital gains. Second, stock owners may receive dividends, which are a share of the company's profits given to shareholders.

Risk: It is possible that a stock investment can result in a loss of the invested capital. This possibility is known as the risk. Stocks tend to be unstable and can experience substantial value changes. This happens more in the short run than in the long run. In brief, while stocks offer the potential for greater rewards, they carry high risk too.

Bonds and their characteristics 

Loan: Essentially, when you buy bonds, you are lending money to a company or government. In exchange, the issuer commits to paying you interest for a specific period and repaying the initial amount when the bond matures. Unlike stock investors, bond investors do not become part owner of the company.

Returns: Like stocks, there are two sources of income from Bonds investment. First, capital appreciation which occurs when bond prices go up, usually when the market interest rate goes down. Second, bonds offer more consistent and reliable returns as they pay interest to the investors on a regular basis. When compared to dividend income from stocks, interest income  is safer and more predictable form of return. 

Risk: Bonds have some risk, even if it's lower than that of stocks. Bond prices can be impacted by many variables including interest rate fluctuations and issuer creditworthiness. In the event that a company goes bankrupt, bond investors can lose their original investment. In such a situation, however, they will have rights to the company’s assets before stock owners can get anything back. 

Muslim investors and Basic Islamic Rules of Investment 

Having learned the difference between stocks and bonds, it is time for Muslim investors find out if it is permissible to invest in them. But before that, we need to learn what are the basic rules of financial transactions that make a financial asset permissible or impermissible. The following major rules apply to financial transactions especially investment in financial assets:

1. Prohibition of Riba: the term Riba is used both in the Quran and the Sunnah of the Prophet (Peace Be Upon Him) which is usually translated as interest. Riba can arise in a loan contract as well as in a like for like exchange of certain assets including money. The vast majority the classical and contemporary Muslim scholars agree that dealing in interest is prohibited. As a result, any financial contract or asset that involves give and take of interest is also impermissible. 
2. Prohibition of Gharar: The word Gharar is often translated as excessive uncertainty in a financial contract which is also considered a prohibited element. Based on the traditions in the prophetic sunnah, Muslim scholars have agreed that any financial contract that has elements of excessive uncertainty is not permissible for Muslims. On this basis, gambling and lotteries are prohibited as is trading in certain financial derivatives.
3. Prohibition of dealing in unlawful of products and services: Another important issue is if any product or service is prohibited, dealing in it also prohibited. Therefore, if a company is dealing prohibited products, like alcoholic drinks and pork, or involved in prohibited financial contracts, like interest and gambling, investing in those companies becomes impermissible. 

Are Stock & Bonds Investment Permissible? 

Now that we have learned the similarities and differences between stocks and bonds as well as the basic Islamic principals that govern financial transactions for Muslim investors, we are ready to see if investment in stocks or bonds is permissible or impermissible. 

Nature of Stocks and It’s Ruling

Investing in stocks turns an investor into a partial owner of a company whose capital is not guaranteed and subject to loss. So, this is not a loan contract between the investor and the company and dividend income is not interest. This could make stock investment permissible given that the company does not deal in any prohibited products and services, as mentioned earlier, and it is not also involved in prohibited financial contracts with other companies (e.g. banks and suppliers, retailers, etc.). In summary, Muslim investors can invest in those stocks that pass through the permissibility filter or screening which are also known as shariah compliant stocks. 

Nature of Bonds and It’s Ruling

We have learned earlier that a bond issued by a company represents a debt contract between the issuer (i.e. the company is the borrower) and the investor (i.e. the investor is the lender). Therefore, in this lender–borrower relationship, any return to the original investment over and above is interest which is prohibited in Islam. In fact, the conventional bond literature uses the word interest to mean the periodic payment to the investors. Even if the word “income” is used instead of “interest”, it does not change the fact that the investor and the company are lender and borrower, respectively, and that the original invested capital is guaranteed to be returned at the maturity. This makes investing in bonds impermissible for Muslim investors.