What is the Upper and Lower Circuit in Share Market?
In June 2021, when suddenly Adani Group’s stocks started hitting the lower circuit in the NSE (National Stock Exchange) for two consecutive days, many people started looking up the definition of the upper and lower circuit in the share markets. So, to ease the buzz a little, we are here to explain to you the concepts of the upper circuit and lower circuit.
Many new investors got scared about Adani’s stocks plummeting to the bottom. Also, trading was halted for a while to excuse any potential exploitation of the share prices. Even though this move was like a punishment for most regular investors, it was made to protect the investors from incurring losses.
As placed by SEBI (Securities and Exchange Board of India), a circuit breaker is someone who acts as a volatility guard for the investors.
Let’s find out the concepts of upper and lower circuits in the share market to understand everything related to them better.
What is an Upper and Lower Circuit for Stocks?
To protect the investors from a huge single-day loss in trading due to price drops or sudden price hikes, the Indian stock exchanges set up price bands regularly. This is usually based on the last trading value of a stock.
So, the upper circuit is the maximum possible value that a stock can be traded at on a certain day. On the other hand, the lower circuit is the minimum price that a stock can be traded on a designated day.
Simply put, the upper and lower circuits in the stock markets are purely a protection move for the investors as set by the exchanges. Here, the limits are set at a certain percentage decided by the stock markets. Usually, it could be anything between 2% and 20%.
Let’s understand it with an example.
Imagine that stock A of a company is traded at a price of ₹100 per stock with a 20% upper circuit. This means that the stock price cannot go below 20% and cannot go above 20% in a particular trading session. During the trading day, even if the company whose stocks are being traded discovers a huge wealth suddenly, its stock prices will only vary between ₹80 and ₹120.
A Few Facts About Upper and Lower Circuit in the Stock Market
- In the stock markets, circuit filters are employed on the previous day’s stock closing value.
- Usually, the stock circuit prices start at 20%.
- To learn about the circuit filters, you can visit the official websites of the stock exchanges.
- When a stock hits the upper circuit, there will be no sellers but only buyers. Similarly, when the stock prices hit the lower circuit, there will be no buyers but only sellers.
- During such cases, the intraday trades get converted to delivery trades.
How to Make the Most of Circuit Bands When Trading?
For a novice trader, it is prudent to avoid trading in stocks that frequently hit the circuits displaying frequently revised circuits. This indicates that the stock exchange is worried about the trading activities linked to that stock, and hence, it is a red flag for you.
If you have already invested in a stock, it is better to exit once the circuit heads towards 5% or below. This is because very little volatility also corresponds to low-profit potentials.
Also Read: Difference Between Stock Investing & Trading
Investors usually tend to lose huge capital during sudden price swings in the stock markets. Hence, the circuit breakers protect them from unwanted losses with upper and lower circuit setups. So, when investing next, always consider the stock circuits to keep off from surprising losses.
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Frequently Asked Questions
These are specified by the stock exchanges under the ‘Notifications and Circulars’ link on their official websites.
For instance, for BSE, you can find the same at - http://www.bseindia.com/markets/MarketInfo/NoticesNCirculars.aspx?expandable=0.
The upper and lower circuit filters in the stock exchanges are decided by the market regulator, Securities Exchange Board of India, or SEBI. And these are revised based on the market volatility or any unusual movement in certain price counters.
It can happen due to several reasons. For example, in the case of positive news flows, there could be a huge demand for the stocks of a particular business, and hence the stock prices may hit the upper circuit. Similarly, the situation could be the opposite in the case of an unfavourable news flow.
Circuit filters usually regulate the price fluctuation on a day’s trading. These filters act as stock market curbs on days of ecstatic or panic selling of stocks. Simply put, they help reduce, to an extent, price exploitation by the stock operators.