Investing in halal stocks is a growing trend among both Muslim and ethical investors. A halal stock is one that aligns with Shariah principles, avoiding companies that engage in prohibited activities like alcohol, gambling, or interest-based financial practices. But how do you know which stocks are truly halal? In this article, we will walk you through the practical steps to check before buying a halal stock.

Understanding Halal Stocks and Shariah Compliance

For a stock to be considered halal (permissible), it must satisfy Islamic guidelines on both its business activities and its financial practices. In simple terms, the company’s core business should not involve anything clearly prohibited (like gambling or alcohol), and its financial situation should be structured in an Islamically acceptable way (for example, limited reliance on interest-bearing debt). Islamic scholars have developed specific Shariah screening criteria to evaluate these aspects. While details can vary across different standards (such as AAOIFI, Dow Jones Islamic Market, or FTSE Shariah indices), all of them revolve around the same basic idea: screen out companies engaged in haram industries or excessive interest-based dealings. In practice, this means an investor must look at what the company does and how it makes its money before deeming its stock “halal”.

What Should You Check Before Buying a “Halal” Stock

Before you buy a stock claiming to be halal stock, go through the following checklist of practical steps to verify its Shariah compliance:

1. Industry and Business Activities

The first step is to examine the company’s core business. Halal stocks must come from industries that comply with Islamic values. Companies involved in haram activities like alcohol production, gambling, tobacco, or adult entertainment are disqualified. This is the easiest check to perform. However, it's important to also consider indirect involvement, such as companies that profit from the haram industries. For example, a company providing services to the gambling industry could still be non-compliant despite not directly participating in gambling .

2. Financial Ratios and Debt Levels

Next, check the company’s financial health. Halal investing requires companies to have minimal reliance on interest-bearing debt. A company that is highly leveraged (with significant debt) may be considered non-compliant with Shariah law. To determine this, look at the debt-to-equity ratio. Typically, if debt exceeds 30% of a company’s market value, it might fail the halal screening . This ensures that the company isn’t relying heavily on interest-based financing, which is prohibited in Islam.

3. Non-Halal Income Sources

Even if a company’s main business is halal, you need to check for non-halal income. If more than 5% of a company’s revenue comes from haram activities, the stock would not be considered halal. For example, if a company earns interest income or profits from other non-compliant sectors, it could still fail the halal screening. Always verify the revenue breakdown in financial statements to ensure that non-halal income is minimal .

4. Shariah Compliance Status

A stock’s Shariah compliance status is crucial. Many investors rely on established Shariah indexes (such as FTSE Shariah or Dow Jones Islamic Market Index) to identify stocks that have passed halal screening. These indexes list stocks that meet Shariah guidelines, giving investors a sense of security. If a stock is listed on such an index or has been certified by a reputable Shariah supervisory board, it’s likely a good candidate for halal investing .

5. Dividend Purification

If a company earns non-halal income (like interest or revenue from haram sources), its dividends may require purification. This means that the portion of the dividend earned from non-compliant sources must be donated to charity. Some investors choose to purify their income automatically, while others handle it manually. The purification process ensures that you remain true to your ethical and religious standards .

Performing these checks will give you a solid sense of whether a stock is halal. You’ll be looking into the company’s annual reports or financial data to gather this information – focusing on revenue breakdowns, debt figures, and notes about business segments. It may seem like a lot of homework, but it’s necessary due diligence for halal investing. (And if this list feels overwhelming, don’t worry – there are easier ways, as you'll see below.)

Simplifying the Process with Hyssa’s Built In Screener  

Manually screening each stock can be time-consuming and complicated. This is where Hyssa comes in as a solution. Hyssa is an all-in-one investment platform built for Muslims and ethical investors, and it features a built-in Shariah screening system to automatically filter out non-compliant stocks. The platform uses a two-tier screening process (business sector checks and financial ratio checks) based on established standards like AAOIFI, ensuring that every stock you encounter on the platform is genuinely halal. In other words, Hyssa does the heavy lifting by analyzing companies’ industries and financials for you – if a company doesn’t meet the criteria, it’s flagged or excluded. This saves you from combing through balance sheets and income statements on your own. With Hyssa, you can confidently browse and invest in thousands of pre-screened halal stocks worldwide that align with your values.. It transforms the halal investing process from a daunting research project into a seamless experience, so you as an investor can focus on building your portfolio with peace of mind.

Conclusion

Investing in halal stocks is an important choice for many Muslim and ethical-first investors. By ensuring that the stock’s business activities, financial ratios, and revenue sources are in line with Shariah law, you can confidently grow your wealth while staying true to your values. While the screening process can seem overwhelming, platforms like Hyssa simplify it by offering automated screening, real-time alerts, and purification tools to make sure your investments stay ethical and compliant.

If you’re looking for a straightforward, halal investing solution, Hyssa provides a user-friendly platform that combines everything you need to start building a Shariah-compliant portfolio. Start your halal investing journey today with Hyssa, and invest with confidence, knowing your wealth is being built the right way.