You often hear on television about stocks hitting upper or lower circuits in the stock market. But what are these upper circuits and lower circuits in the share market?
These are limits on the share price that keep volatility in check.
The upper circuit is like a guardrail for stock prices. Just like a guardrail protects you from going off the road, the upper circuit protects stock prices from going too high in quick time. When a stock hits the upper circuit, it's like hitting the guardrail - trading is temporarily halted to allow everyone to catch their breath and assess the situation. The percentage at which the upper circuit is set varies depending on how fast the stock moves and how much liquidity there is.
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Think of the lower circuit as a safety net for stocks. Just as a trapeze artist relies on a safety net to prevent a hard fall, the lower circuit prevents stocks from plummeting too quickly. When a stock's price hits the lower circuit, it's like the safety net has been deployed, and trading in that stock is temporarily halted. This gives investors a chance to catch their breath and reassess the situation, helping to prevent panic selling and excessive losses. So, next time you're trading stocks, remember that the lower circuit keeps you safe.
You'll often find stocks hitting upper or lower circuits due to the market's balance of demand and supply. If a sudden rush of demand for a stock surpasses the available supply, the stock's price can skyrocket and hit the upper circuit. On the other hand, if a sudden drop in demand for a stock surpasses the available supply, the stock's price can plummet and hit the lower circuit. To prevent wild price swings and to provide investors with a chance to re-evaluate their holdings, upper and lower circuits are put in place as a protective measure.
When you're investing and a stock hits its upper circuit, it's like a famous new restaurant everyone wants to try. Suddenly, there's a rush of people wanting a table, and the restaurant can't accommodate everyone at once. With upper circuits, it's possible to prevent the stock's price from skyrocketing in a single day, just like the restaurant can't serve everyone at once. This protects you from volatility and undue speculation.
On the other hand, when a stock hits its lower circuit, it's like a product recall for a popular gadget. News shows the gadget has a major flaw, and everyone stops buying it. The existing gadget owners can't sell it because no one wants it anymore. When no one is buying, the gadget's price might drop, and fear of investing in a falling product might lead to the price falling. To prevent this, lower circuits are set, just like the gadget company might recall the product to prevent further damage to its reputation.
In case of a sudden and drastic movement in the stock market, a market-wide circuit breaker system kicks in to prevent further damage. Think of it as a fire alarm but for the stock market.
This system is triggered when the index, such as the BSE Sensex or the Nifty 50, moves up or down by 10%, 15%, or 20%. Once triggered, a coordinated trading halt is enforced nationwide across all equity and equity derivative markets. It is like putting the stock market on hold so investors can catch their breath and reevaluate their positions.
After a breach of the index-based market-wide circuit filter, the market will reopen with a pre-open call auction session. The duration of the market halt and the pre-open session is determined as follows:
|Trigger limit||Trigger time||Market halt duration||Pre-open call auction session post market halt|
|10%||Before 1:00 pm.||45 Minutes||15 Minutes|
|At or after 1:00 pm upto 2.30 pm||15 Minutes||15 Minutes|
|At or after 2.30 pm||No halt||Not applicable|
|15%||Before 1 pm||1 hour 45 minutes||15 Minutes|
|At or after 1:00 pm before 2:00 pm||45 Minutes||15 Minutes|
|On or after 2:00 pm||Remainder of the day||Not applicable|
|20%||Any time during market hours||Remainder of the day||Not applicable|
As a stock market investor, you may wonder how to take advantage of upper and lower price bands. Here are some tips:
You now have a solid understanding of the upper and lower circuits in the stock market. Think of the market like a rollercoaster - it has ups and downs and can leave you feeling dizzy and disoriented. However, with the safety features of these circuits, you can confidently navigate the ride without fear of financial whiplash. So buckle up, keep an eye on those limits, and enjoy the thrilling investing journey!