The Upper Circuit and Lower Circuit are popular mechanisms used in the share market. It is the price band or price range in this stock that fluctuates in the stock exchange. The stock exchange has both lower and upper circuits limiting a stock’s price.
The upper circuit is the maximum price at which a stock could reach in one day. The lower circuit is the minimum price at which it could fall.
These are bound to stop extreme changes in prices within a short time and create panic buying or selling out there. They stop trading when a stock hits those limits. It provides a cooling-off period to traders so they do not make hazardous decisions.
The upper circuit is the touch date when a stock can reach the day’s high in one day. On the other hand, the lower circuit is considered the lowest where a stock can dip in one day. Once the stock touches any circuit, then the trading is stopped for some time or the remaining period of the trading session. So that the investors can calm down and make rational decisions.
Another circuit breaker kick-in is whenever extreme market situations occur. It is applicable not only to single stocks but sometimes to the general stock market. Circuit breakers work as automatic halts in trading which can give traders and investors ample time to absorb the information involved and refrain from making rash decisions based on either greed or fear.
What is an Upper Circuit in the Share Market?
The upper circuit is the highest price a stock can go up to on a trading day. Once a stock hits the upper circuit, no more trading happens on that day. When the price of stock rises rapidly, then it hits the upper circuit in the share market. It temporarily affects further price increases or buying activity for that stock.
This mechanism controls excessive speculation, prevents overvaluation, and maintains market stability. However, the percentage range for the upper circuit always varies from 5%, 10%, or 20%. The percentage variation depends on the exchange and market conditions.
How Upper Circuit Works in the Share Market
The upper circuit kicks in when there is heavy buying. The upper circuit triggers, when the stock price rises rapidly and reaches the limit.
For example, if a stock is trading at ₹100 with a 10% upper circuit, it can go up to ₹110 in a single day. Once the stock reaches this limit, trading stops, and it cannot go higher.
In the case when buying interest continues, demand often exceeds supply, but trades can only happen at or below the upper circuit price. Trading stops temporarily or for the entire session.
Impact of Upper Circuits on Traders
If the stock reaches the upper circuit, then there are only buyers. There’s no one selling. That could be good news for people who already own the stock because that price will go up. But for the buyer, they might not get a chance as nobody wants to sell.
This is frustrating for traders who want to buy the stock after it hits the upper circuit. That is when they will not be able to buy the stock at the desired price as there are no sellers, thus losing the high.
This is a typical occurrence in highly speculative stocks where demand far outweighs supply leading to trading freezing at the upper circuit price.
What is a Lower Circuit in the Share Market?
The lower circuit is the lowest price a stock can go down in a day. It prevents the stock from falling further once it hits this limit. It acts as a safeguard to prevent extreme downward price movements.
When the price of the stock falls rapidly, then it hits the lower circuit in the share market. It temporarily affects further price decreases or buying activity for that stock. This mechanism happens to curb panic selling, protect investors, and maintain market stability. However, the percentage range for the lower circuit always varies from 5%, 10%, or 20%. The percentage variation depends on the stock’s volatility and exchange regulations.
How Lower Circuit Works in the Share Market
A lower circuit happens when everyone is trying to sell a stock, and no one is buying.
For example, if a stock is priced at ₹100 with a 10% lower circuit, it can only fall to ₹90. After that, trading stops to avoid more price drops.
In this case, sellers find it difficult to offload their shares, leading to a situation where demand dries up, and the stock faces a liquidity crunch.
Impact of Lower Circuits on Traders
Lower circuits are bad news for traders who want to sell. When the lower circuit hits, there are no buyers, and traders can’t sell their stock. This could lead to heavy losses, especially if the stock keeps falling in the future.
It creates a panic situation for the traders. In addition, for the long-term investor, it can provide an opportunity to buy stocks at lower prices if they anticipate a recovery in the future.
Factors That Trigger Upper and Lower Circuits
There are many reasons why upper and lower circuits are triggered:
- General Market Sentiment: The overall market will be in an upward or downward trend that will see the stocks flying. In the former case, the upper circuits might be reached as optimism among investors pumps up prices. On the other hand, in the latter case, the selloff is so heavy that stocks might enter lower circuits for fear.
- Company News: Statements of earnings, management changes, mergers, and other company-specific events can make the stock hit circuit limits. Upper circuits get triggered on positive news, whereas negative news incurs a lower circuit.
- Global Events: Political developments, economic data releases, or global crises such as a trade war or a pandemic can cause huge price movements that will put on circuits.
- Shortage: If stocks are in short supply or witness much demand, they may jump into the upper circuits. Those suffering from oversupply or declining interest may slide into the lower circuits.
How to Use Circuit Breakers in Stocks to Your Advantage
Circuit breakers can help you manage risks. Here are some tips:
- Avoid Highly Volatile Stocks: Stocks that frequently hit upper or lower circuits are often risky and can lead to significant losses if not managed carefully. It’s better to focus on fundamentally sound stocks with more stable price movements.
- Buy Before Upper Circuit Hits: If you believe a stock is set to rise due to positive news or market conditions, consider buying before it hits the upper circuit. However, do your research to avoid overpaying for a stock that may be corrected later.
- Watch for Lower Circuits to Buy: Stocks hitting lower circuits can sometimes present buying opportunities, especially if the price drop is due to temporary factors. However, be cautious and assess the reasons behind the fall before investing.
How to React During Upper and Lower Circuits?
This is a very sensitive period for an investor when the stock reaches either the upper circuit or the lower circuit. It shows the times the stock price touches the limit to rise further (in the case of the upper circuit) or has fallen (in the case of a lower circuit).
Investors must become wise and refrain from moving at a hasty pace as such movements can be fore-warnings of significant changes either in the market or in the future of the stock.
Your strategy when it comes to these circuits will vary by considering the factors of your goals, and your evaluation of market conditions and the stock’s future potential. Let’s explore the best methods for dealing with such situations.
Strategies for Investors During an Upper Circuit
An upper circuit happens when a stock’s price rises to the maximum limit for that day, often due to high demand or positive market sentiment. In this case, the market is generally bullish, meaning prices are going up.
Buying or Selling Decisions in a Bullish Market
During an upper circuit, one might be tempted to buy more shares of the stock, hoping its price will continue to escalate. But this strategy is not always the best. Here’s why:
- Assess If the Stock is Overpriced: Sometimes when a stock hits its upper circuit, the price may have moved too much. It could mean that the stock is now priced higher than its intrinsic value. So, you buy it here, and the price may not go up much; the worst part is it might even go down once the hype has died out.
- Booking the Profits by Selling: If already holding the stock and it reaches the upper circuit, then it’s time for selling to book the profits. Selling in case you get an understanding that the stock has achieved the upper circuit or there are some hints of a market correction may take place.
- Avoid Panic Buying: Many new investors get excited when they find their favorite stock hitting the upper circuit and head out to grab it. Often they pay a price that is too high if the stock starts falling after some short while. You do your homework on what news is driving up the price and the fundamentals of the stock before you do anything.
Strategies for Investors During a Lower Circuit
A lower circuit occurs when a stock’s price falls to its minimum limit for the day, usually because of heavy selling pressure or bad news about the company or market. The market is typically bearish in this case, meaning prices are dropping, and there’s fear among investors.
Protecting Your Portfolio During a Bearish Market
When a stock hits its lower circuit, the situation is different from an upper circuit. Here, the focus should be on protecting your investments from further losses.
- Evaluate Why the Stock is Falling: Since you found that it’s hitting the lower circuit, understand why is it there. Is there temporary bad news that is creating a problem or it’s a deep problem for the company? Whether the short-term issues are short-term in nature, for example, bad earnings report or temporary market fall etc, the stocks might start rebounding sooner.
- Sell Weak Stocks: If the selloff of the stock is based on severe issues with the company, whether it is fraud, bad management, or bankruptcy, it would be wise to sell and reduce your losses. Otherwise, if you hang on to the stock that continues to fall, you can just end up losing more. Selling it while you may still gain some value recovered is better instead.
- Avoid Panic Selling: Even though it’s a call to avoid panic buying at an upper circuit, it is equally important not to do panic selling at a lower circuit. Not every fall means the stock is doomed. Take time to analyze the situation and make calm, rational decisions.
Frequently Asked Questions
Q.1 What happens when a stock hits the Upper circuit?
When a stock hits the upper circuit, it stops the treatment. No new buyer can place an order. It creates a high demand with limited supply.
Q.1 What happens when a stock hits the lower circuit?
When a stock hits the lower circuit, it stops the sell order below the limit. Sellers may struggle to exit their positions.
Q.2 What are the typical limits for upper and lower circuits?
The percentage limit for the upper and lower circuits is 5%, 10% or 20%
Q.3 Can Upper and lower circuits both hit in a day?
No, it is not possible. Stock can only hit either the upper circuit or lower circuit in a single day.
Q.4 How do circuit breakers help to manage the market?
Circuit breaker helps to control extreme price movement by temporarily stopping trading.
Q.5 Can the circuit limit apply to all stock?
Yes, a circuit limit applies to almost all stock.
Q.6 Can I place an order when the circuit limit is high?
Yes, a trailer can still be bought or sale order, but the order must be within the set price only.
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