In the stock market, an "upper circuit" refers to the maximum price limit a stock can reach in a single trading day, while a "lower circuit" represents the minimum price it can fall to within the same session.
These price limits are predetermined by stock exchanges to curb excessive volatility and protect investors from extreme price fluctuations.
When a stock hits either the upper or lower circuit, trading in that stock may be temporarily halted or restricted, depending on regulatory mechanisms.
This circuit breaker system ensures market stability by preventing panic selling or speculative buying from causing abrupt and uncontrollable price movements.
Key Points About Upper and Lower Circuits
Purpose:
Upper and lower circuits are regulatory mechanisms implemented by stock exchanges to prevent extreme volatility in stock prices.
These circuits help stabilize the market by curbing excessive price fluctuations that may arise due to sudden spikes in buying or selling pressure.
By imposing these limits, stock exchanges aim to maintain orderly trading and protect investors from unpredictable market movements.
Calculation:
The upper and lower circuit limits for a stock are determined based on a predefined percentage of its previous day's closing price.
These percentages vary depending on the stock's category, liquidity, and risk profile, as set by the stock exchange.
Different stocks may have different circuit limits, ensuring that the price movements remain within a controlled range.
Impact on Trading:
Upper Circuit: When a stock reaches its upper circuit limit, it signifies that demand for the stock has surged significantly, resulting in more buyers than sellers.
At this point, trading is temporarily halted to prevent excessive price inflation. The stock can resume trading only when sell orders emerge, bringing the price below the upper circuit limit.
Lower Circuit: Conversely, when a stock hits its lower circuit, it indicates a sharp decline in demand, with more sellers than buyers.
This triggers a suspension in trading to prevent further decline. Trading can only resume when there is sufficient buying interest to push the stock price above the lower circuit limit.
These circuit limits serve as an important risk management tool, preventing panic-driven sell-offs or speculative surges that could destabilize the market.
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