The stock market may be an unpredictable beast when it comes to investing. Prices move quickly, frequently as a result of outside events like economic news, political developments, or shifts in market mood. The usage of circuit breakers is one of the precautions that stock exchanges all around the globe have put in place to assist stop market volatility from getting out of hand. We’ll examine circuit breakers in further detail in this article, focusing on the definitions of “upper circuit” and “lower circuit.”
What are Circuit Breakers?
When prices undergo extreme volatility, a circuit breaker is a regulatory tool intended to momentarily suspend trading on a certain stock or securities exchange. Circuit breakers are designed to stop massive panic buying or selling that can trigger market collapses. Circuit breakers allow investors the opportunity to process new information or events and reassess their holdings before making snap choices by momentarily pausing trading.
When prices exceed a predefined level, circuit breakers are set off. These limits are often specified as a percentage change from the closing price of the previous day. The precise proportion varies each exchange and may fluctuate occasionally depending on the state of the market. Investors are not permitted to purchase or sell shares during the trading stop, which normally lasts between 15 and 30 minutes. Trading continues normally when the time period is through.
Upper Circuit and Lower Circuit
In India, the circuit breakers installed on the National Stock Exchange (NSE) and the Bombay Stock Exchange are referred to as the “upper circuit” and “lower circuit” (BSE). When the price of a stock or index increases by more than a specific percentage, an upper circuit is activated, and when the price decreases by more than that percentage, a lower circuit is triggered.
The Securities and Exchange Board of India determines the precise threshold at which the circuits are activated, which differs every exchange (SEBI). For equities listed on the NSE and BSE as of 2023, the upper circuit limit is 20% and the lower circuit limit is 10%. This implies that trading will be suspended for 15 minutes if the price of a stock increases or decreases beyond specified limitations.
The upper and lower circuits’ main goal is to curb market volatility that is too high. For instance, if a stock price increases too rapidly, it can indicate that investors are buying on speculation rather than based on basic analysis of the business. Similar to how falling stock prices too rapidly may indicate panic selling rather than a logical reaction to fresh information.
Trading is momentarily stopped by activating the circuits, allowing investors time to evaluate the situation and come to a more wise choice. Circuit breakers are designed in the hopes that by limiting excessive volatility, they can aid in averting market collapses and shield investors from jarring losses.
Trading Strategies for Circuit Limits
Circuit breakers, especially for short-term traders who depend on volatility to produce profits, can have a considerable influence on trading methods. Trading is suspended when a circuit is activated, so investors cannot buy or sell shares during that period. For traders who hold positions in the market and were expected to benefit from a certain price change, this might be discouraging.
Having numerous positions in the market is one tactic that traders might employ to lessen the impact of circuit breakers. Traders can lessen their exposure to any one specific stock or market area by diversifying their bets over a number of equities or assets. This might lessen the impact of circuit breakers tripping on a particular stock or market sector.
Another tactic that traders might employ is to keep a careful eye on the news and market mood. Traders who follow market trends might foresee probable circuit breaker triggers and modify their positions as necessary.
Can we sell stock in upper circuit?
When a stock is in the upper circuit, the exchange’s daily maximum price cap has been reached for that stock. Trading in that stock is suspended while the circuit is active, thus neither buyers nor sellers are permitted to make purchases or sell their shares.
Investors are free to purchase or sell shares as they like when the upper circuit is removed, allowing trade in the stock to continue. Selling a stock in the upper circuit does not, however, ensure that the deal will be carried out instantly or at the specified price. The stock might increase more, or demand could outpace supply, causing delays or changes in pricing.
It’s also important to keep in mind that the upper circuit limit was created to prevent market crashes due to extreme market volatility and unexpected, fast price changes. Investors should thus proceed with caution when trading companies that are in close proximity to their upper circuit limit. While investing in a company that is gaining quickly might be alluring, there is always the chance of a fast price correction, which could result in substantial losses.
Can we buy in lower circuit?
A stock is said to be in the lower circuit if its price has dropped to the exchange’s daily minimum limit. Trading in that stock is suspended while the circuit is active, thus neither buyers nor sellers are permitted to make purchases or sell their shares.
Investors are free to purchase or sell shares as they like when the lower circuit is removed, allowing trade in the stock to continue. The purchase of a stock in the lower circuit does not, however, ensure that the deal will be conducted instantly or at the specified price. The stock might keep declining or supply could outpace demand, causing delays or changes in pricing.
It’s also important to note that the lower circuit limit is intended to avoid excessive market volatility and rapid, quick price changes that might trigger market collapses. Investors should use caution when trading companies that are in close proximity to their lower circuit limit as a result. While it may be alluring to invest in a company that is declining quickly, doing so carries the risk of additional price decrease and potential losses.
Who Decides Upper Circuit And Lower Circuit?
The stock exchange where a stock is listed determines the upper circuit and lower circuit limitations for that stock. The Securities and Exchange Board of India (SEBI), for instance, determines the circuit limitations for equities listed on the Bombay Stock Exchange and the National Stock Exchange in India (BSE).
The circuit limits are intended to avoid excessive volatility and abrupt price changes in the market. Often, they are established as a percentage of the stock’s closing price from the previous day. Many variables, including as the liquidity of the stock, its market size, and the current market circumstances, might affect the precise percentage at which the circuit limitations are established.
The upper circuit and lower circuit limits are generally intended to give the stock market some stability and predictability by limiting abrupt price changes that might be upsetting to investors and the overall economy. Stock exchanges attempt to create a more efficient and orderly market by enforcing these limitations, which is advantageous to investors, issuers, and other market players.
How Upper Circuit and Lower Circuit is Calculated?
A stock’s upper circuit and lower circuit are determined as a percentage of the stock’s closing price from the previous day. Many variables, including as the liquidity of the stock, its market size, and the current market circumstances, might affect the precise percentage at which the circuit limitations are established.
For equities listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India, for instance, the Securities and Exchange Board of India (SEBI) has established the following circuit limits:
- The upper circuit limit and lower circuit limit for equities with a market value of more than Rs. 10 billion are 20% and 10%, respectively.
- The maximum circuit limit for equities with a market capitalization under Rs. 10 billion is 10%, while the lower circuit limit is 5%.
Imagine, for instance, that a stock with a closing price of Rs. 100 the day before has an upper circuit limit of 20% and a lower circuit restriction of 10%. This indicates that the stock cannot increase by more than 20% from its closing price the previous day (up to Rs. 120) or decrease by more than 10% from its closing price the previous day (down to Rs. 90) in a single trading day.
Different stock exchanges and nations may have various methods for calculating circuit limitations. Circuit restrictions are, however, often established to avoid excessive volatility and abrupt price changes in the market and to give investors some level of stability and predictability.
How to Exit From Lower Circuit Stock?
It might be difficult to sell a lower circuit stock since trading is suspended during the circuit period, making it impossible for buyers to acquire the stock and sellers to sell their holdings. Investors are free to purchase or sell shares as they like when the lower circuit is removed, allowing trade in the stock to continue. The purchase or sale of a stock in the lower circuit does not, however, ensure that the deal will be carried out instantly or at the specified price.
After the lower circuit is removed, you can place a sell order if you own a stock in it and want to liquidate your shares. It’s crucial to have reasonable expectations and to be ready to modify your asking price in response to changing market conditions. There could be a lot of sellers in the market if the stock has dropped dramatically, which might cause delays or price changes.
As an alternative, you can want to keep the stock and watch for a price increase. This might be a hazardous tactic because it’s always possible that the stock will drop further, causing more losses. Nonetheless, it can be worthwhile to think about keeping onto the stock and waiting for the market to settle if you have a long-term investing horizon and trust in its fundamentals.
In conclusion, selling a lower circuit stock might be difficult, but it’s crucial to be patient and ready to change your plan of action depending on the state of the market. Before making any investment decisions, investors should always perform careful study and analysis. They should also be ready to modify their holdings in response to new information or market changes.