Stock markets are renowned for their volatility, and investors have frequently suffered significant losses due to sudden market swings.
As an investor, you should know what is upper circuit and lower circuit. The SEBI has created circuits (lower and upper) that define the maximum & lowest price limits to evaluate stock movements during the day to protect investors’ interests. You must keep in mind, as an investor, that a stock’s price must stay within its upper circuit in one trading session and cannot move over it.
Circuit breakers might be thought of as an investor’s protection against volatility. To understand upper and lower circuit meaning better, keep reading!
What are Upper Circuit and Lower Circuit?
The upper circuit is the maximum point beyond which a stock’s price or an index’s value cannot increase in value in one day. Stocks with many buyers but few sellers might reach the upper circuit. Upper circuits are computed using the closing price from the previous day.
Whereas, when a stock is under sell pressure and there are not enough buyers, the price may drop, resulting in a “lower circuit.” Lower circuits are determined by using the previous day’s closing price, and they can change from stock to stock.
The upper circuits of certain equities might be found at a price 2% above the closing price from the day before. Other equities may have their upper circuits at 5%, 10%, or 20% or above their closing prices from the day before.
On the other hand, the lower circuit for certain stocks may be 2% less than the prior closing value, whereas the lower circuit for those other stocks could be 5%, 10%, 15%, or 20% less than the initial closing value.
Upper and lower circuits for stocks
In stock markets, the sole purpose of lower and upper circuits is to shield investors from the extremely volatile nature of the markets. The stock exchanges set a price range each day based on the stock’s most recent traded price to safeguard investors from a significant single-day reactionary share price decline or boost.
The limit might be established at a percentage-based number set by the share market. It might range from 2% to 20%.
As an illustration, let us assume that stock A, trading today at Rs 200 per share, has a 20% circuit. Thus, neither the share price nor its growth during the trading session may be greater than 20%. Even if the firm discovers a gold mine beneath its office space throughout the day, the price will fluctuate between Rs 180 and Rs 220.
Upper and lower circuits for indices
Not only may circuits be utilized for individual stocks, but they can also be used for an index. Therefore, the circuit breaker mechanism warns when an indicator lowers or climbs by 10%, 15%, or 20% considerably.
When this occurs, trading is suspended in India’s stock markets and its derivatives markets. The duration of this halt might range from a couple of minutes to the rest of the trading day. It is based on the index’s decline percentage.
- Based on the exchanges’ closing prices from the day before, the maximum allowable limit for equities is determined.
- The website of the stock market has information about circuit filters.
- Lower circuits relate to a larger share of supply than demand, while upper circuits relate to a higher share of demand than supply.
- SEBI is the only authority in India concerning circuit filters.
- Whenever a stock hits its upper circuit, there are no sellers and just buyers. Similarly, there are sellers and no buyers whenever a stock hits its bottom circuit.
Conclusion
Circuit limits are created to shield investors from excessive speculative and volatile behavior. In a perfect scenario, the price of a stock would only reach the lower and upper circuits when its attractiveness changed.
Investors risk significant financial loss in the case of abrupt fluctuations. Circuit breakers were included for this reason—to shield the investor from unpleasant surprises. Investors must be cautious not to do transactions only based on equities or indices reaching their lower or upper circuits. Circuits may serve as a safeguard and a warning sign for some businesses.
You should always include the circuit when predicting a stock’s price movement since you now understand the upper and lower circuits, what may cause a stock to hit these limitations, and what occurs when stocks or indexes hit these limits.