Investments, Trading and Gambling

Investments, Trading and Gambling

In the context of risks, trading and gambling are both regarded as speculative risks. In both trading and gambling, one can profit or lose. However, there are key differences which make gambling and trading inherently different. Some of the differences from a Shariah perspective are:

1) Gambling is considered to be the staking of wealth by two or more parties where the winner wins all and the loser loses all. In other words, gambling is winning at the expense of another’s loss. Whereas in trades and investments, counter-parties and shareholders (ordinary shares not preference shares) collectively gain or collectively lose. 

2) Gambling does not involve ownership of underlying assets. It is merely staking your wealth. Whereas trading and investing demands ownership of underlying assets.

3) Payouts or ‘profits’ in gambling is pegged upon the occurrence of an uncertain event; usually in a ‘yes or no’ proposition or a binary stake. The outcome and profit is a result of one of the propositions occurring. In investments, profit is not pegged upon the occurrence of an uncertain event, rather, there are multiple factors resulting in a profit yield, primarily, the performance of the underlying asset relative to various economic, political, social and managerial factors.

4) Gambling involves transfer of ownership of one’s wealth conditionally on the occurrence of an uncertain event. This is prohibited in Shariah. In investments and trading, uncertainty and risk is not in the transfer of ownership, rather, one purchases and invests in underlying assets in the very beginning. The investor entertains asset-ownership risk from the very outset but bears investment risk in the interim. 

5) In gambling, loss occurs as a result of chancing incorrectly. It a win or lose proposition. In investments, loss is as a result of bad performance of the underlying assets. It is not a simple win or lose proposition. 

6) Gambling has gharar (gross uncertainty) as the transfer of ownership is suspended on an uncertain event. Investments have ghurm (risk) and dhaman (liability) as a result of the transfer of ownership from the very beginning.

Professor Sami al-Suwailem describes the difference between gambling and investments in the Theory of Gharar in his paper on ‘Hedging in Islamic Finance’. The following is a paraphrase of his arguments: 

Game is used to denote a for-profit exchange among two or more agents, whereby agents’ payoff are uncertain at the beginning of the game.

Games can be classified according to the sum of players’ playoff into three categories: positive-sum, zero-sum or mixed-sum.

1) Positive-sum game are games in which players have common interests, and thus they gain together or lose together. An example of a positive-sum game is partnership or musharakah. Since each partner contributes capital and labour, both would gain if the project succeeds and both would lose if it fails. The size of the payoffs need not be equal for the two parties. But they must gain together and lose together, although the contribution of each might not be equal.

2) Zero-sum game are games in which one party gains and the other loses. Gambling is the most obvious example. One player wins and the expense of the other. Again, the magnitudes of gain and loss need not be equal. The term ‘zero-sum’ indicates that the interests of players are in direct opposition. 

3) Mixed games are games that include both sorts of outcomes; the zero-sum game as well as the positive-sum outcome. These games allow for mutual gain, but also imply the possibility of conflict of interest. Examples of mixed-games include share-cropping/Muzara’ah, Ju’alah and ‘urbun.

In a zero-sum game, one party gains at the expense of the other. It is a pure transfer of wealth for no counter-value. Since each party is seeking profits not donations, it becomes therefore a sort of ‘eating wealth for nothing’, strictly condemned in the Qur’an. Further, a zero-sum game is a game with direct conflict of interests, which represents the source of enmity that accounts for the prohibition of maysir or gambling in the Qur’an: “Satan only wants to plant enmity and hatred among you through wine and maysir.” (Qur’an 6:91)

Characteristics of zero-sum games:

1) Whatever one party gains is what the other loses. 

2) Gains and losses in a zero-sum game are determined bilaterally – between the two parties of the contract. That is, an actual net transfer of wealth takes place at maturity from party to another, with no counter-value in exchange. 

In conclusion, the above points are some of the reasons why investments and gambling are inherently different despite the outcome being uncertain for both. An investor speculates by taking ownership of assets and bears the risks of the assets. An investor profits as a result of the positive performance of the underlying assets for which he has assumed ownership risk. On the other hand, a gambler speculates by conditionally staking wealth on an uncertain event without taking ownership of any asset. A gambler profits if his bet materialises and as a result takes his share and the share of the loser as profit.

Faraz Adam

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