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 ...