Question Summary:
I am a day trader of stocks. Is it permissible to short sell in Islam.?

Question Detail:

I am a day trader of stocks. Is it permissible to short sell in Islam. Short selling is the selling of a stock that the seller doesn't own at the time of selling them. He sells them in the hope that the price of those shares will decline, and he will profit by buying back those shares at a lower price.

Answer :

In the name of Allah, Most Gracious, Most Merciful
Assalaamu `alaykum waRahmatullahi Wabarakatuh
We notice you are Deen-conscious and it is this desire to follow the Shari’a which has made you contact to our institute for an Islamic ruling reading your occupation. May Allah accept you intentions and assist you in earning a lawful livelihood, Ameen. 
At the outset, we would like to state that our Institution does not hold dealing in the Stock Market to be permissible. Therefore, to buy and sell stocks in any form will not be permissible. Nevertheless, we would like to address the issue of short sale itself in the light of Sharia.
Short sale is a market transaction in which an investor borrows shares from a stock broker and sells the borrowed shares on the market in anticipation for stock price to decline in the future. After selling these stocks, he awaits for the price to declines to the desired amount upon which he purchases the shares and returns them to the stock broker.
Generally the seller deposits an amount with the broker which is equal to the value of the stocks borrowed and the deposit remains with the lender until the same number of shares from the same stocks are returned. The investor by selling at a higher rate and purchasing at a lower rate makes a profit from the difference.
Short sales are not permissible for the reason that the investor is selling an item for which he never became the owner. He merely borrowed the stocks from the broker and sold them. This is clearly against the teachings of Islam:
عن حكيم بن حزام قال قلت يا رسول الله الرجل يسألنى البيع وليس عندى أفأبيعه قال لا تبع ما ليس عندك – ابن ماجه
Hakim ibn Hizam (Radiyallahu 'Anhu) narrates that he said, “O Prophet of Allah, a person asked me to sell him something which I do not possess, may I sell it to him?” the Prophet of Allah replied, “Do not sell which you do not possess.”
عن عمرو بن شعيب عن أبيه عن جده قال نهى رسول الله صلى الله عليه وسلم عن سلف وبيع وعن شرطين فى بيع واحد وعن بيع ما ليس عندك وعن ربح ما لم يضمن – سنن النسائى ، مسند أحمد
‘Amr ibn Shu’ayb narrates from his father how narrates from his grandfather that the Prophet of Allah (Sallalahu 'Alayhi Wasallam) forbid from having two conditions in one transaction, selling which you do not possess, benefiting from a commodity you did not bear the risk. (Nasa’i, Ahmad)
Since the investor is selling shares which were never in his ownership and only borrowed them from the broker, he will fall under the above mentioned narrations. Hence, short selling will not be permissible in Shari’a. We advice you to search for an alternative occupation in which you are not involved in an impermissible transaction. May Allah assist you and make it easy for you, Ameen.
And Allah knows best
Wassalam
Ml. Ehzaz Ajmeri,
Student Darul Iftaa
Checked and Approved by:
Mufti Ebrahim Desai
Darul Iftaa, Madrassah In'aamiyyah