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

Abstract

Introduction The purpose of this paper is to analyze the structure and the operation of both the primary and the secondary markets for stocks and bonds, including the use of options, warrants, and rights in the securities market of a modem economy, such as the United States, with a view to ascertain which of these securities might be permissible to invest in under an IsIamic economic system. Section I starts with a brief description of the nature and operation of the primary and the secondary markets for securities. It then describes the nature and scope of each type of security in terms of risks and returns to the issuer and the investor. Section II starts with an interpretation of the Islamic injunctions with respect to trade and investment. It then proceeds to examine the extent and conditions under which investment in particular securities may be permissible under an Islamic Economic System. Section III summarizes the results of the study and concludes with some tentative suggestions. I. INVESTING IN SECURITIES A. PRIMARY AND SECONDARY MARKElS FOR SECURZTZES The primary market is the market where securities are first issued by corporations (or joint stock companies) and/or by governments. In the United States, as well as in other countries, the issuer of the security announces through the news media its intention to issue the security at a future date. Such an ...