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What are Upper Circuit and Lower Circuit?

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It’s a known fact that stock markets are volatile in nature. Sudden price fluctuations have often led to investors suffering major losses.

To safeguard an investor’s interest, SEBI (Securities and Exchange Board of India) introduced circuits (upper and lower) that sets the maximum & minimum price levels to determine stock fluctuations within a day. As an investor, you must remember that the price of a stock cannot rise beyond its upper circuit in a single trading session.

A stock may hit the lower circuit when there is sell pressure with a negligent number of buyers. Lower circuits are calculated based on the closing price of the previous day and it may vary from stock to stock.

The maximum price a stock can reach on a given trading day is called the “upper circuit” and a minimum price that a stock can hit on a particular trading day is known as the “lower circuit”.

What is Upper Circuit and How it works?

In the stock market, the terms "upper circuit" and "lower circuit" are used to describe the maximum and minimum price levels that a stock can reach during a trading session. These price limits are set by the stock exchanges to curb excessive volatility and prevent market manipulation.

What is Lower Circuit and How it works?

The lower circuit is the lowest price level that a stock can reach during a trading session. When a stock hits its lower circuit, trading is paused to prevent further price declines. The lower circuit meaning is crucial for traders as it shows the minimum price depreciation limit for a stock. A stock hitting the lower circuit indicates an excess of sellers over buyers, leading to a sharp decline in the stock's price. Understanding what the lower circuit in the share market signifies can help investors make informed decisions during volatile market conditions.

Upper and lower circuits for stocks

Stock exchanges set up a price band every day that’s based on the last traded price of the stock. The purpose of doing this is to protect investors from extreme single-day price fluctuations (hike & drop). Upper and lower circuits (as described in the above paragraph) in stock markets are done purely to protect them from the drastic volatility of the stock markets.

Upper and lower circuits for indices

Circuits aren’t necessarily used for only individual stocks, but they can also be implemented for an index. Hence, when an index dips significantly, the system of circuit breaker raises a red flag.

When this occurs, trading gets halted in both the equity and derivative markets in India. This halt can last from a few minutes to the remaining of the trading day. It depends on the percentage of the downfall in the index.

What drives the Upper/Lower Circuit?

Several factors drive the upper and lower circuits in the stock market:

Market Sentiment: Positive or negative news about a company or the market can drive stock prices to their upper or lower circuits.

Economic Indicators: Changes in economic indicators like GDP growth, inflation rates, and interest rates can impact stock prices.

Corporate Actions: Announcements of dividends, bonuses, stock splits, or mergers can influence stock prices significantly.

Regulatory Announcements: Decisions or policy changes by regulatory bodies can cause stocks to hit their upper or lower circuits.

Global Events: International events such as geopolitical tensions, global pandemics, or major economic shifts can affect stock prices.

Five essential facts related to the upper and lower circuit

  • The maximum permissible limit for stocks is calculated based on the previous day’s closing price on exchanges.
  • Circuit filters can be found on the stock exchange’s website.
  • Upper circuits refer to the higher demand for shares than supply, whereas lower circuits refer to a higher supply of shares than demand.
  • In India, SEBI is the sole decider of circuit filters.
  • There are only buyers and no sellers when a stock hits its upper circuit. Likewise, there are only sellers and no buyers when a stock hits its lower circuit.

How will you use price bands and circuits on stocks to your advantage? The price bands are set by the NSE and the BSE on all securities. Most investors, (especially retail) tend to buy stocks in the mid and small cap space. Such stocks are susceptible to wild fluctuations, either way. Circuit filters help these small investors by providing protection against big losses. In case you’ve already invested in a stock, it’s advisable that you exit when you notice the circuit level advancing. Mild volatility generally also corresponds to low earning potential.

Conclusion

However, in certain cases, market manipulators can try to influence the demand and supply for a stock. As an investor, kindly consider the circuit of a stock while making predictions on your price movement. Be careful not to solely base your trading on stocks hitting their upper or lower circuits! For more informed trading decisions, download Bajaj Broking now

FAQs

Can I buy shares in the Upper Circuit?

No, once a stock hits the upper circuit, trading is halted, and you cannot buy shares until the price stabilizes.

Can I buy shares in the Lower Circuit?

Yes, you can buy shares in the lower circuit if there are sellers available, but it's often challenging due to the excess of sell orders.

What happens when a stock hits the upper circuit or lower circuit?

When a stock hits the upper circuit, trading is halted to prevent further price increases. Conversely, when a stock hits the lower circuit, trading is paused to stop further price declines.

Is it good to buy upper circuit shares?

Buying upper circuit shares can be risky as the price has already peaked for the day. It’s essential to analyze the reasons behind the price surge before investing.

Is it good to buy shares in lower circuits?

Buying shares in the lower circuit can be advantageous if you believe the stock will recover, but it also comes with high risk due to the significant price drop.

Can I sell in a lower circuit?

Selling in a lower circuit is prohibited as there are usually more sellers than buyers, making it difficult to find a buyer at the desired price.

What is the time limit for the upper circuit?

The time limit for the upper circuit is until the end of the trading session for that day unless the stock exchange decides to resume trading.

How do I exit the lower circuit share?

Exiting a lower circuit share requires finding a buyer willing to purchase at the lower circuit price, which can be difficult during high sell pressure.

How is the lower circuit calculated?

The lower circuit is calculated based on a percentage of the stock’s closing price from the previous trading day, as set by the stock exchange.

How long does the lower circuit last?

The lower circuit can last until the end of the trading session for that day or until the stock exchange resumes trading if conditions stabilize. 

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