Updated Mar 21, 2022

What are the upper circuit and lower circuit?

What are the upper circuit and lower circuit?

What is Stock Market? 

It's a stock exchange where you may buy and sell shares in publicly traded companies. Companies raise money in the primary market by selling shares to the general public in an initial public offering (IPO).

After new securities are sold in the primary market, they are traded in the secondary market, where one investor buys shares from another at the current market price or whatever price the buyer and seller agree on. The regulatory authority oversees the secondary market or stock exchanges. The Security and Exchange Board of India regulates the secondary and primary markets in India (SEBI).

Stock dealers can trade company stocks and other securities on a stock exchange. A stock can only be bought or sold if it is listed on an exchange. As a result, it acts as a marketplace for stock buyers and sellers. India's two most prominent stock exchanges are the Bombay Stock Exchange and the National Stock Exchange.

What Is A Circuit In Stock Market?

In the stock market, a circuit is a maximum gain or loss for any stock in a single day. That means the stock cannot go beyond or below the circuit limit in a single day. In the stock market, this is also known as the circuit breaker. A circuit breaker is also used on indices, in addition to stocks. The circuit breaker mechanism is used at three stages of the index movement: 10%, 15%, and 20%. The stock market will come to a standstill when the index circuit breaker is tripped. The stock exchange devised this to prevent stock price manipulation. Every stock has an upper and lower limit set by them.

What is Circuit Breaker?

On the Indian stock market, circuit breakers have been installed for a variety of equities. The most common percentages are 2 percent, 5%, 10%, and 20%. Circuit breakers are only present in stocks traded in the derivatives market. An index-based market-wide circuit breaker mechanism operates on Indian stock exchanges at all three phases of index movement on either side, at 10%, 15%, and 20%. All equity and equity derivative markets across the country come to a halt when these circuit breakers are tripped. The movement of either the BSE Sensex or the Nifty50, whichever comes first, triggers market-wide circuit breakers.

As a result, when a circuit breaker is triggered in any equity, trading in that equity is restricted. No additional purchases are permitted in the event of an upper circuit or buying freeze, and no further sales are permitted in the event of a lower circuit or selling freeze. The circuit breaker limit varies from 5% to 20% depending on the stock to stock ratio. The circuit limit is also adjusted depending on the stock's performance. Assume that the stock continues reaching the 20% upper circuit every day; after a few days, the stock exchange will limit the circuit to 10%. In intraday charts, once a circuit is reached, the graph becomes a straight line. An example of a stock market circuit on the Hotel Leela share can be seen in the image below.

What are the different daily restrictions?

On any given trading day, a stock can move up to 5%, 10%, or 20% on each side, depending on its category.

However, the maximum allowed limit for equities is determined using the previous day's closing price on exchanges.

Here's something you should be aware of. A stock that has reached the upper circuit cannot go much higher on that day, but it can go lower if a new supply is available at a cheaper price than the circuit filter price. Similarly, if a stock reaches the lower circuit, it cannot fall any further, but it is possible to buy at the lower circuit since there will be plenty of sellers.

Why do stocks hit circuits?

A single stock may enter the market for a variety of reasons.

For example, if there is a lot of great news, there may be a lot of demand for a company's stock, and the stock may hit the upper circuit. In the event of a negative news flow, the situation might also be reversed.

• Upper Circuit: There is a greater demand for shares than there is supply 
• Lower Circuit: There is a greater supply of shares than there is a demand for them.

Who makes the decisions for circuit filters?

The circuit filters are set by the market regulator, the Securities Exchange Board of India, or SEBI, and are updated as market volatility or odd behavior in specific counters changes.

Aside from that, the circuit filters are updated regularly based on market liquidity.

• For equities with high liquidity, circuit filters are increased.
• For illiquid equities, circuit filters are decreased.

Bottom line

The upper circuit is the highest amount a stock can reach on a given trading day, while the lower circuit is the lowest price a stock can reach on that same trading day. There will be only buyers and no sellers in the first situation, and only sellers and no buyers in the second case.