Namaste!
Today I'm going to share Some more terms related to stock market. My aim to help you familieize yourself with commonly used market terminologies and their concepts.
Today I'm going to discuss about upper circuit and lower circuit. Honestly first i was also confused with these terms , than i study about them and learn it. Now i want to share this with you all.
Source
In the Indian stock market , an upper circuit and a lower circuit are mechanisms that are used to regulate extreme price movements of stocks or securities.
Basic of Upper and lower circuit for stocks :
Stock exchange set up a price band for each stock basesd on its last traded price. This is done to protect investors from sudden and extreme price fluctuations in a single trading session. These price bands are commonly referred to as upper and lower circuits.
The purpose of setting up these price bands is to protect investors from the drastic volatility of the stock market.
Upper circuit:
An upper circuit in the stock market is the maximum level or price to which a stock can move in a day. Once a stock touches its upper circuit,it means there are buyers available and no sellers are present. Now trading in that particular stock is also temporary suspended. This is to prevent investors from continuing buying the stock at inflated price, which could cause a market bubble.
Circuit limit set on the basis of previous day's closing price, it may be 20%, 10% or 5% , depending on the stock exchange's Criteria for a given stock.
For instance, the first time a stock breaches its upper circuit, the exchange may apply a circuit limit of 20% on previous day's closing price. Then, if it continues to hit its upper circuit, the limit may be lowered sequentially to 10% or 5% to limit excessive trading activities.
Once a stock hits its upper circuit,it cannot move any higher on that day , but it can go lower in case there is a fresh supply of shares in the stock market.
Lower circuit:
Once you understood the upper circuit, you can easily understand lower circuit, just opposite to upper circuit.
A lower circuit is the maximum percentage decrease in the price of a stock in a single trading session. Once a stock touches its lower circuit ,it means there are only seller's in the market, no buyers are present.
When a stock hits its lower circuit, trading in that particular stock is also temporary suspended. This is to prevent investors from continuing selling the stock at deflated prices, which could cause a market crash.
What drives the upper and lower circuit?
As we know how share prices rise and fall... it is demand and supply , when there are a higher number of buyers in the Market as opposed to the number of sellers , then the stock price goes up due to high demand.
Similarly, when the number of sellers more than the number of buyers , then the stock price go down as a result of low demand or excessive supply.
The foeces of demand and supply are the most fundamental drivers that lead a company to reach the point of upper or lower circuit in the Indian stock market.
However, several other factors can also impact, like :
Changes in interest rate , financial performance of a company , changes in agreement etc.
Ex. Yesterday suzlon energy limited hits upper circuit.
So if investor know about it, he/she can take right decision.
Hope you found this post useful.