Table of contents
- An Overview of Circuit Breakers
- What are Upper Circuits?
- What are Lower Circuits?
- Upper and lower Circuit Mechanism
- Upper Circuit Stocks and Lower Circuit Stocks – Implications for Traders and Investors
- What Happens When Indices Hit Upper or Lower Circuit?
- Factors driving the Upper and Lower Circuits
- Benefits of Circuit Breaker in the Stock Market
- Final Thoughts
- FAQs
In the Indian stock market, circuit in share market mainly act as an investor protection measure imposed by SEBI. The lower and upper circuit breakers are mechanisms that regulate the extreme price movements of securities or stocks. Such circuit breakers, or price bands, are helpful in preventing stocks from getting oversold or overbought. This is because it could make the market conditions even more volatile than it already was.
An Overview of Circuit Breakers
In trading, upper and lower circuits define the maximum price increase or decrease a stock can experience in a single session. The upper circuit limits the percentage increase, while the lower circuit sets the maximum decrease. These limits are calculated based on the previous closing price and vary from stock to stock, as determined by the stock exchange.
The SEBI implements these circuit filters to maintain market stability. Investors should be aware of these limits when making investment decisions. For example, buying a stock near its upper circuit can increase the risk of a price correction, while selling a stock near its lower circuit could miss potential rebounds. This guide helps you understand the significance of upper and lower circuits in the stock market.
What are Upper Circuits?
The upper circuit is the point at which an index’s value or a stock’s price cannot increase in a single day. Stocks that are very desirable to purchase but nearly impossible to sell may reach the upper circuit. The upper circuits are determined using the previous day’s closing price.
Certain equities may be trading 2% higher at their upper circuits than at the previous day’s closing. The upper circuit in share market of other stocks can be 5%, 10%, or 20% higher than the closing price on the previous trading day.
In a single trading session, a stock’s price is not allowed to rise over its upper range. However, if more individuals begin to sell, the prices may drop.
What are Lower Circuits?
The lower circuit represents the absolute minimum that a stock’s price or an index’s value may fall to. Stocks that are in high demand for sale but in low demand for purchase may be placed on the lower circuit.
Additionally, lower circuits are determined by the closing price of the stock the day prior, which varies according to the company.
The lower circuit for some firms maybe 2% less than the closing price on the preceding trading day. The lower circuit may be 20%, 15%, 10%, or 5% less than other companies’ most recent closing price.
A stock’s price may not drop below its lower circuit in share market in a single trading session, but it may rise if buyers begin to purchase the shares.
Upper and lower Circuit Mechanism
Consider a situation in which an upper circuit lock is present in a stock. This indicates that the stock’s price has risen to the daily maximum allowed owing to strong purchasing demand. Investors are limited to placing purchase orders during this period; all other trading will cease until the following trading session.
In a similar vein, a stock’s price decreases when it enters the lower circuit in share market, which indicates intense selling pressure. Until the next trading session, trading in the stock remains suspended.
Upper Circuit Stocks and Lower Circuit Stocks – Implications for Traders and Investors
Upper and lower circuits may significantly impact both traders and investors. For example, the upper circuit serves as a stopgap against sudden price increases, enabling investors to assess their holdings before taking more action. Conversely, a lower circuit in share market can protect investors from suffering significant losses in the event of a steep drop in the value of a stock.
These circuit limitations may also have an impact on trading tactics. When a stock opens at the circuit limit, traders can plan to take advantage of any price fluctuations. It’s important to keep in mind, though, that NSE circuit breaker have the dual ability to prevent abrupt price swings and to temporarily restrict market access, which may have an impact on liquidity.
What Happens When Indices Hit Upper or Lower Circuit?
Trading only pauses for 45 minutes when an index, such as the NSE price band changes in Nifty or the BSE’s Sensex, increases or falls by 10% before 1 PM. Additionally, trade is only halted for fifteen minutes if this ten per cent increase occurs between 1 and 2:30 PM. However, trade does not halt, and the index is regarded as having a greater volatility index (VIX) if it increases by 10% after 2:30 PM.
Similarly, trade ceases for one hour and forty-five minutes if the index price increases or decreases by fifteen per cent before 1 PM and for forty-five minutes if this occurs after 2:30 PM. Nevertheless, trade is halted until the end of market trading hours when the market index moves 15% in any direction after 2:30 PM.
Lastly, trade is suspended for the day when the market index reaches the third NSE circuit breaker limit, which is 20%. This implies that trading will not take place that day.
Factors driving the Upper and Lower Circuits
Following are some events that may lead the stock to hit its lower or upper circuit in share market:
- Underperforming expectations or earnings outperforming
- Geopolitical pressures
- Political uncertainty
- Change in interest rates
- Changes in trade scenario
- Fiscal expansion or consolidation
- Competitors outperforming or underperforming
Benefits of Circuit Breaker in the Stock Market
- When a stock’s trading ends because it crosses the circuit limit, traders have some time to consider investing.
- The waiting period also provides extra time for reflection, technical and fundamental analysis of the stock, news and corporate announcements research, and decision-making on the impact of these events on the stock price and subsequent course of action.
- If the market is operating normally and then abruptly breaks down, trading is halted because there may be a panic scenario there, and investors or traders may begin making rash purchases or sales, adding to the already tense atmosphere.
Final Thoughts
So, now you know what is upper circuit and lower circuit in share market. The purpose of circuit breakers is to safeguard investors from excessive speculation and volatility. Ideally, a stock’s price should only reach the lower and higher circuits in response to a shift in the stock’s attractiveness. However, market manipulators occasionally may attempt to affect the supply and demand for a stock. Investors need to exercise caution when making trades based only on the upper or lower circuits of equities or indexes.
FAQs
There are many buyers and no sellers when a stock price is at its peak. You may sell if you’d like to since the upper circuit will be full of purchasers.
It is challenging to purchase a stock when its price reaches the upper circuit since there aren’t many sellers. Purchasing at the upper circuit price may require buyers to wait for the stock price to drop.
The level of change in the index’s value and the moment the index reaches that value determines how long an Indian stop will last. This article’s prior section covered market-wide circuit breakers in detail. The circuit for stocks doesn’t terminate at a set time.
The lower and upper circuit in share market on the value of an index or the price of a stock are known as the lower and upper circuits. Circuit filters are determined by the Securities and Exchanges Board of India (SEBI) in India.
When the stock hits the upper circuit price, there are no sellers in the market—only buyers. The repurchase of the stock that was first sold for intraday trading is made more difficult by this circumstance. As a result, the intraday transaction automatically becomes a delivery trade.
The intraday upper circuit penalty refers to the restriction imposed on a stock when it hits the upper circuit limit during a trading session. Once a stock reaches the upper circuit, it cannot be traded further until the next trading session. This prevents excessive speculation and volatility in the stock price.
To find the upper circuit of a stock, check the stock’s circuit filter or price band on the stock exchange’s website or through your brokerage platform. The upper circuit is usually based on a percentage increase from the previous day’s closing price, and this limit is set by the stock exchange.
When a stock hits the upper circuit intraday, trading in that stock is temporarily halted for the day. The stock cannot trade beyond this limit until the next trading session, even if there is continued buying interest.
You cannot sell shares once the stock hits its upper circuit limit on that trading day, as no further transactions are allowed. However, you can sell shares on the next trading day when the circuit limit resets.
The stock exchange, based on the SEBI (Securities and Exchange Board of India) guidelines, decides the upper and lower circuit limits for each stock. These limits are typically set as a percentage of the previous day’s closing price.
If a stock hits the lower circuit, you may not be able to sell it during that session, as trading is halted. You can only sell the stock when trading resumes in the next session or when the price moves out of the lower circuit range.
