What are Upper Circuit and Lower Circuit in Share Market
5paisa Research Team
Last Updated: 02 Jul, 2024 10:26 AM IST
Content
- Upper and lower circuits for stocks
- Upper and lower circuits for indices
- What drives the upper/lower circuit?
- Five essential facts related to the upper and lower circuit
- How to use circuits or price bands on stocks to your advantage
- Conclusion
In the Indian stock market, an upper circuit and a lower circuit are mechanisms that are used to regulate extreme price movements of stocks or securities. These circuit filters, also known as price bands, are put in place to prevent stocks from being overbought or oversold, which could result in volatile market conditions.
An upper circuit is the maximum percentage increase in the price of a stock in a single trading session. When a stock hits its upper circuit, trading in that particular stock is temporarily suspended. This is to prevent investors from continuously buying the stock at inflated prices, which could cause a market bubble.
On the other hand, a lower circuit is the maximum percentage decrease in the price of a stock in a single trading session. When a stock hits its lower circuit, trading in that particular stock is also temporarily suspended. This is to prevent investors from continuously selling the stock at deflated prices, which could cause a market crash.
It is important to note that upper and lower circuits are calculated based on the previous closing price of the stock. The percentage increase or decrease is predetermined by the stock exchange and varies from stock to stock. The circuit filters are put in place by the Securities and Exchange Board of India (SEBI) to promote stability in the stock market.
Investors need to be aware of the circuit filters when making investment decisions. For example, if a stock is trading close to its upper circuit, it may not be a good time to buy that stock, as the chances of a price correction are higher. Similarly, if a stock is trading close to its lower circuit, it may not be a good time to sell that stock, as the chances of a price rebound are higher.
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Frequently Asked Questions
The upper circuit in the share market refers to the maximum percentage increase in the price of a stock or an index for the day. This is determined by the stock exchange and is based on the previous day's closing price. Once a stock hits its upper circuit limit, trading is halted, and the price is frozen until the market reopens. This mechanism is in place to protect investors from excessive volatility and to prevent market manipulation. While upper circuits can be beneficial for investors who have already invested in a stock, they can also be risky for those looking to buy in, as they may not be able to purchase the stock at a reasonable price.
In the share market, the lower circuit is a price limit that restricts the trading of a stock below a certain price point. It is implemented to prevent excessive price declines in the stock market. The lower circuit sets a limit on the minimum price of a stock, below which no further trading is allowed for the day. If the stock's price hits the lower circuit, trading is suspended, and investors cannot sell the stock below the circuit limit. The lower circuit can be triggered by various factors, including negative news about the company or the industry, a drop in market sentiment, or a global economic slowdown.
The upper and lower circuit limits for stocks are determined by the stock exchanges based on the previous day's closing price. The circuit limits are set as a percentage of the previous day's closing price, typically ranging from 10% to 20% depending on the stock's volatility. If a stock hits its upper circuit limit, no further buy trades can be executed above that price, and if it hits the lower circuit limit, no further sell trades can be executed below that price. These circuit limits serve as a protective mechanism to prevent extreme price fluctuations and to ensure market stability.
Upper and lower circuit limits are imposed in the share market to avoid excessive volatility and protect investors from drastic price movements. These limits act as a safety mechanism that temporarily halts trading in a particular stock or index when its price moves beyond a pre-determined threshold. The use of circuit limits also helps maintain market stability and promote fair trading practices. Overall, the imposition of upper and lower circuit limits helps ensure a more orderly and stable stock market for investors.
No, not all stocks are subject to upper and lower circuit limits. Circuit limits are generally applicable to stocks that are considered highly volatile and prone to extreme price fluctuations. The stock exchanges typically identify such stocks and impose circuit filters based on their volatility. The criteria for determining which stocks are subject to circuit limits may vary from exchange to exchange and may depend on factors such as market capitalization, trading volume, and liquidity.
When a stock hits the upper circuit, it means that the price has reached the maximum limit allowed for the day as per the circuit filter. Trading is then temporarily halted in the stock, and buyers can only purchase shares if sellers are willing to sell at the upper circuit price.
Similarly, when a stock hits the lower circuit, it means that the price has reached the minimum limit allowed for the day as per the circuit filter. Trading is temporarily halted in the stock, and sellers can only sell their shares if buyers are willing to purchase at the lower circuit price. In other words, there are more sellers than buyers, which creates a surplus of available shares.