What is the Upper and Lower Circuit?

Upper circuit and lower circuit are price limits imposed by stock exchanges to prevent extreme price fluctuations. The upper circuit is the maximum allowed price change, and the lower circuit is the minimum allowed change for a stock or index in a single trading day.
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  • 10 Aug 2023
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In stock market trading, traders and investors often encounter terms that might sound intricate but are crucial for making informed decisions. Two such terms are upper circuit and lower circuit. These concepts play a significant role in shaping the behavior of certain stocks, impacting trading activities, and influencing investment strategies.

To comprehend upper and lower circuits, one must first grasp the notion of circuit breakers. These circuit breakers are regulatory measures implemented by stock exchanges to prevent extreme price volatility and maintain market stability. When a stock's price reaches a predefined threshold, trading is temporarily halted. This threshold is termed the circuit limit.

An upper circuit refers to the upper price limit the stock exchange sets beyond which a stock cannot be traded on a particular trading day. On the other hand, a lower circuit is the lower price limit at which a stock's trading is halted for the day. These circuit limits are calculated as per the previous day's closing price.

To illustrate, consider a scenario involving a stock with an upper circuit of 10%. If the stock's previous day's closing price were Rs 50, trading would be halted for the day if the price reaches Rs 55 (Rs 50 + 10%). Similarly, if the stock has a lower circuit of 8%, trading would pause for Rs 46 (Rs50 - 8%).

Understanding the Mechanism

Imagine a scenario where a stock is locked in an upper circuit. This means that due to substantial buying interest, the stock's price has surged to the maximum permissible limit for the day. During this phase, investors can only place buy orders, and no further trading can occur until the next trading session.

Similarly, when a stock reaches the lower circuit, it signifies excessive selling pressure, causing the stock's price to plummet. Trading in the stock remains suspended until the next trading session.

Upper and lower circuits can have significant implications for traders and investors alike. For instance, the upper circuit acts as a temporary shield against rapid price escalation, allowing investors to evaluate their positions before making further moves. On the flip side, a lower circuit can safeguard investors from severe losses during a sharp decline in a stock's value.

Additionally, these circuit limits can also influence trading strategies. Traders may strategize to capitalize on potential price gaps when a stock opens at the circuit limit. However, it's crucial to remember that circuit breakers can both safeguard against extreme price movements and temporarily limit market access, potentially affecting liquidity.

  1. The calculation of the maximum allowable threshold for stocks depends on the preceding day's closing price, as observed on the exchanges.
  2. Details regarding circuit filters are available on the official website of the stock exchange.
  3. Upper circuits signify a situation where the demand for shares surpasses the available supply. Conversely, lower circuits indicate an excess supply of shares compared to the existing demand.
  4. Circuit filters are determined exclusively by SEBI.
  5. Only buying activity occurs When a stock reaches its upper circuit, and no selling transactions occur. Similarly, only selling happens when a stock hits its lower circuit, with no buying transactions happening.

In Conclusion

In the intricate tapestry of the stock market, upper and lower circuits stand as essential threads, weaving together the fabric of stability and order. These circuit breakers, guided by predetermined price limits, serve as safety mechanisms to mitigate the impact of extreme volatility.

FAQs

Upper and lower circuits are price limits imposed on trading stocks within a single trading session. These limits aim to prevent extreme price fluctuations and ensure a stable trading environment.

Upon reaching the upper circuit price, the market features solely buyers, with no sellers present for the stock. This situation complicates the repurchase of the stock initially sold for intraday trading. Consequently, the intraday trade transforms into a delivery trade as a natural outcome.

When a stock reaches the upper circuit threshold, there is a temporary pause in trading. Once the upper circuit restraint is lifted, trading recommences, enabling investors to buy or sell the stock as usual.

When a lower circuit is triggered in the stock market, trading is temporarily suspended for a designated duration. Typically, a pause of 15-20 minutes is employed to facilitate market stability before the recommencement of trading. Throughout this interval, prospective buyers cannot submit bids, and sellers are prohibited from presenting their shares for sale.

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