Since the concept of investing has slowly been introduced into a much larger portion of the population, I am quite sure that many of you have read articles informing you that a particular share has reached its ‘upper circuits’ or its ‘lower circuits’.
But what do these words mean?
High and low circuits are buying / selling limits which are set for a special shares or indices. These are the two types of circuit breakers which are in the stock market currently.
These are circuit breakers in stock markets. The very ones that resemble old fashioned switches and are commonly referred to as “fuse” in colloquial speech. Similar in function.
Similar to the circuit breakers, which shut down power supply when overloaded, stock market circuit breakers are mechanisms that pause trading of shares and other instruments when what you might term as overloaded as well.
An “overload” for a stock market circuit breaker is a situation where a stock suffers sharp and quick changes in its price in a short space of time.
A rise or a fall of sufficient significant value is capable of triggering the circuit breaker.
The length of pull back depends on the percentage by which the price has moved and halts at that value for some time.
For the individual stocks, the upper or low circuit percent depends upon the direction of the single stock price movement and its category. For index-based market wide filter the rates are 10, 15 and 20 percent.
In the case where the circuit breaker for a particular single share is activated, the share is delisted from trading.
However, if an index declines or increases by any of the above percentages, the entire stock market is suspended for the period described below.
How do stocks reach the Upper or Lower Circuit
In other words, these relatively low and volatile prices the stocks are determined by the force of demand and supply which operates freely in the market.
The price of shares tends to rise and fall depending with the level of demand; if the demand increases beyond the supply of the stock then the prices of share rise and as the demand goes down the prices of share also goes down.
At this point you may ask, ‘If demand or supply of the share sets the price then is efficiency of operation of the company of any significance’
The answer to this present question therefore is, ‘yes, it absolutely is relevant’.
Let me explain how.
Likewise, as it succeeds, people, including the shareholders and other investors, tend to learn of this successful operation.
This is a perfect complement to the modern global economy and now the purchase of one share grants the investor ownership of a part in the company.
And so as the company prospers, individuals seek to accrue the advantages of said improvement by becoming participants directly in the company. Through put or the share that existing shareholders wish to acquire and the new shareholders who wish to invest in the project.
This in turn means that, the demand for the share also increases. It is understood that people are willing to give a higher price for said share but up to a given limit.
And the price goes up in order to account for this need.
Likewise, where the performance of the company declines, the existing shareholders’ desire to exit and leave a sinking ship while new shareholders do not want to buy any of the company’s shares.
As mentioned above, in both the cases of price rise and fall, the movement in share value happens to the extent that the market (read: It is their [investors] opinion that it should be so categorized.)
Consequently, the price fluctuates to a small extent and then attain a definite level.
What is an Upper Circuit?
Stock exchange can be described as the brokers’ market place. Each of this stock here has its price which it fluctuates within any single given day.
The “Upper Circuit” aspect refers to the maximum amount, through which the price of a particular stock may rise in a single trading session. It is like a speed limit for a car; that is, just a mechanism to slow things down.
Now, when a stock reaches the upper circuit, trading of that stock becomes even more limited. Why? That is mainly because there always exist many buyers with little or even no sellers in the market.
In layman’s terms, there’s FOMO for everything but there is no FO MO for anything. This serves to take the price to the maximum allowable level in the day.
What is a Lower Circuit?
Now, let’s flip the coin. The “Lower Circuit” is in its opposite – Lower Circuit is the lowest level that a stock could possibly drop to in a given Single trade session.
It is kind of like being a bungee jumper – one can only move as low as the cord stretches before displaying a rebound effect.
A stock hitting the lower circuit means there is a lot selling pressure —everyone wants to come out of the stock but who wants to buy is the question? They’re nowhere to be found.
That is the reason investors can give attention to each time a stock attains the lower circuit. However, it is not always hard and sometimes it is due to news or market or some other fluctuations or just for a while only.
Why Do Circuits Exist?
Good question! There are circuits for the purpose of maintaining stability of the market and safeguarding the investors.
Otherwise, the shares might face gigantic oscillations over short periods depending on speculation or manipulation, or just panic buying and selling.
This is as if to be on a roller-coastering, whirling round and round excitedly but hanging by a cliff without anything to hold you back.
Stock exchanges establish these limits as some sort of self-protection measures. Circuits are important because they limit the amount of daily fluctuation a particular stock can exhibit thereby allowing investors to make informed decisions.
How Do Circuit Limits Work?
Such circuit limits are usually expressed in percentages of the most recent closing price of the respective stock. Here’s how it works:
Daily Circuit Limits: These may be as low as 2%, or 5%, or even 10% or 20% as determined by the particular stock as well as the rules governing the exchange.
Index Circuit Breakers: In the case of broader market indices like the Nifty or Sensex, trading ceases if the index fluctuates more than a certain percentage —say 10%– within some time period.
For example, a stock that closed at 100 and its 10percent cash circuit it can’t go below 90 (lower circuit) or above 110 (upper circuit) today.
Stock trading rules: The importance of buying shares during an upper circuit.
Purchasing shares during upper circuit has been something like chasing a unicorn. Why? And it is purely because while trading, for instance, when a particular stock reaches its upper circuit, demand outstrips supply. While there are a large number of consumers, it seems that the number of sellers is almost negligible.
Here’s how you can try:
- Place a Pre-Market Order: Be the early bird. You should place a buy order in pre-market session at the upper circuit price.
- Limit Order: So, you should set your buy order as “limit order” at the exact upper circuit price. Market orders will not do here as sellers are a rare commodity.
- Be Patient: Still, you are placing your funds at risk with a limit order — and there is no guarantee that the order will even be met. You’ll be in a line and only when some people are willing to sell will it be your turn.
Buying shares is quite easy especially when doing it in a lower circuit.
Purchasing during a lower circuit is often difficult since most of the time the market trend is bearish. It is now panic amongst most investors while buyers are scarce.
Limit Order: Set a call order at the lower circuit value. As usual, market orders will not be effective because there are no guarantors of stock above the lower circuit price.
Research: Have a clear view on why the stock is likely to be down. It is or it is not a chronic condition? Do not make the wrong decision based on the vane “such cheap prices” or “such low price.”
Stay Cautious: Catching a falling knife can end up with a painful consequence that cannot be ignored. Circuit stocks in the lower circuit can decline further, hence such opportunities should be personally by a well laid strategy.
How to Sell shares during a Lower Circuit
Selling during a lower circuit is as impossible as selling ice cream during a blizzard. This means if there are no buyers for whatever you are selling by placing a sell order, your order may remain open forever, untriggered.
To improve your chances:
Pre-Market Order: Buy a sell order in the pre-market session.
Limit Order: Ensure you sell at exactly the lower circuit price of your shares.
Monitor Closely: If you order did not go through, watch the stock during the day, so you properly enter the trade. Sometimes buyers could come back at some other day.
The biggest dangers of trading in circuit stocks are;
Trading in upper and lower circuit stocks is really not for the weak knee or for those with a weak heart. Here’s why:
- Liquidity Issues: Few people who trade make it difficult to conduct various trades.
- Price Volatility: It is to note that the price fluctuations might be rather high, which can lead to a great deal of losses.
- Manipulation Risks: These include stocks that are traded in small quantities, and these are usually considered to be manipulated.
Generally, ensure that you do your research or do not concentrate too much on one area. In the stock market, the only thing that works is diversification.
FAQs
1. Is it possible for a stock to trigger more than one circuit within a given day?
But a stock can touch both the upper and lower circuit in the same trading session very much but cannot land exactly at that particular position. When it gets to this quantity, trading within that direction is limited.
2. What are ways of determining the circuit limits?
Circuit limits are actually boundaries defined by the stock exchanges in consideration of its stability such as price volatility, the liquidity of the stocks, and other legal requirements.
3. Should I purchase a stock at the upper ceiling?
It depends. They conclude that upper circuit stocks suggest demand but if an individual is not careful, they could be RIP offs. Do not invest blindly in the stock make sure that the stock has the sound fundamentals.
4. Can circuits impact mutual funds ?
Yes, mutual fund stocks that go to upper or lower circuits can influence a mutual fund’s performance. Despite this, mutual funds are diversified thus the risk is diversified.
5. What is the condition when an index reaches the set sensible circuit?
In case Nifty or Sensex that comprises the most active stocks touches a particular threshold, known as a circuit limit, all trading across the market is suspended for a given time.
This enables investors to make decisions without panicking, and it also give them enough time to make the necessary analysis.