So, I was asked to share my strategy for investing in stocks. Please excuse this ramble; there’s a lot of background research that went into this.
Always remember the golden rule of investing: don’t invest a single dollar you can’t afford to lose. I.e. this comes out of “disposable” income, not your rent/groceries/etc.
- Invest in something that is 100% halal, not in any sort of grey area.
- Invest in something low-risk but low-return.
- Invest in a way that I can contribute, say, $100-200 a month – I don’t need to be a multi-bajillionaire to invest.
- Market conditions should be irrelevant.
- Investment horizon is 10-20 years; I’m not looking to make a quick buck.
The investment vehicle that meets all these goals is dividend-bearing stocks. These are stocks that give, on average, 2-5% return on investment. So if you hold $100 worth of shares, you can expect to make $2-$5 in dividends that year.
As a side note, the stocks themselves tend to go up in price, because the companies are consistently delivering value to customers and growing their business; that’s how they can afford to keep giving (often, increasing) dividends each year.
This works because of compounding – if you invest $1200 a year ($100/month), that $1200 makes $25-$60/year, which you can use to buy more stocks. Over time, it adds up.
Finally, over the long-term, you take advantage of price. Diversity is important; every month, look at the stock that’s down the most, and buy that one. That will lower your average price paid, so it’s easier to make money.
From the Islamic perspective, there are just a couple of requirements:
- The stock itself is halal – no tobacco companies, entertainment (sorry – movies, games, etc.) or anything unethical
- The company has no more than 33% debt-to-equity (usually translates to assets-vs-debt). This is a middle opinion (25% most conservative, 50% most liberal) and I can take care of this for you.
Some non-Islamic conditions I would put on top:
- The company is worth at least $10B market cap. This minimizes the chance that people can manipulate the price.
- The EPS (Earnings Per Share) is more than the DPS (Dividends per Share). This means the company is earning more than it’s giving shareholders.
Please let me know any questions/comments/concerns you have. InshaAllah if you guys are seriously in, I can recommend a broker and divulge my list of stocks. (I researched over 100 and have a list of about 20-30 that I invested in.)