The Operation of the Modern Financial Markets for Stocks and Bonds and its Relevance to an Islamic Economy

Abstract

IntroductionThe purpose of this paper is to analyze the structure and the operation ofboth the primary and the secondary markets for stocks and bonds, includingthe use of options, warrants, and rights in the securities market of a modemeconomy, such as the United States, with a view to ascertain which of thesesecurities might be permissible to invest in under an IsIamic economic system.Section I starts with a brief description of the nature and operation of theprimary and the secondary markets for securities. It then describes the natureand scope of each type of security in terms of risks and returns to the issuerand the investor. Section II starts with an interpretation of the Islamic injunctionswith respect to trade and investment. It then proceeds to examine theextent and conditions under which investment in particular securities maybe permissible under an Islamic Economic System. Section III summarizesthe results of the study and concludes with some tentative suggestions.I. INVESTING IN SECURITIESA. PRIMARY AND SECONDARY MARKElS FOR SECURZTZESThe primary market is the market where securities are first issued bycorporations (or joint stock companies) and/or by governments. In the UnitedStates, as well as in other countries, the issuer of the security announces throughthe news media its intention to issue the security at a future date. Such an ...