More often we comes to know a particular share or stock has hit upper circuit OR that stock has hit lower circuit, that stock has upper froze. So what exactly is the meaning of freezing and circuit in stock market/share market?
As we all know some or the other time the market price is based on sentiments. In case of sudden news/important news and extreme euphorbic single-sided the sentiment can become uncontrolled and people starts buying or selling shares enormously. The price of scrip can move very fast, increase and decrease in an uncontrolled way in case of extreme sentiments.
That’s why exchange has the provision of circuit filters. In this post, I will tell you and discuss more on upper and lower circuits in share market and will also discuss how to trade upper circuit stocks/scrips/share.
What Is Circuit In Stock Market / Share market?
A circuit in stock market is the limit of gain and loss that can actually drive in a single day for any stock/scrip/share. That means in a simple day the stock cannot go above or below the circuit limit. We can say it is boundations decided by exchanges like NSE/BSE/NYSE through these two points upper and lower circuits.
This is also called the circuit breaker in the stock market. A circuit breaker is not only meant for shares instead is also applied to indices apart from stocks. Circuit breaker system applies at 3 stages of the index movement these are – 10%, 15%, 20%.
When the index circuit breaker is triggered there will be a trading halt in the stock market. This is basically created by the stock exchanges to stop manipulation in a stock price. That is why exchange fix an upper limit and lower limit on each and every stock. These are known as circuit in stock market.
What is Circuit Breaker in stock market ?
Circuit breakers are in place for various stocks on the Indian stock market. The certain values of these are 2%, 5%, 10% or 20%. Only Stocks that are traded in the derivatives like FnO segment do not have any circuit breakers.
On the Indian stock exchanges, an index-based market-wide circuit breaker system applies at all the three stages of the index movement on either side, at the 10%, 15%, and 20%. When these circuit breakers, triggered, bring about a coordinated trading halt in all equity and equity derivative markets nationwide. Market-wide circuit breakers are triggered by the movement of either the BSE Sensex or the Nifty50, whichever of the two hits the trigger first.
When the circuit breaker happens to trigger in any equity the trading of equity also becomes limited. In the case of upper circuit or buying freeze no further buying is allowed and in case of the lower circuit or selling freeze no further selling is allowed in the markets.
The circuit breaker limit depends on the stock to stock between 5%-20%. The circuit limit also is changed based on the stock behaviour. For example particular stock is hitting 20% upper circuit every day, so after a few days closely watching by the stock exchanges the circuit will be limited to 10% by the stock exchange. Once a circuit is hit the graph becomes a straight line in intraday charts. See the image below for an example of a circuit in the stock market on Hotel Leela share.
After that, if the stock continues to move up or down in the same way and at the same pace, then again the circuit is limited and changes to 5% this time. This is same as we try to tame an uncontrolled horse. One thing to remember, that stock futures do not have any circuit filter and hence it is extremely risky to trade them.
Just like stocks our stock indices like Nifty50 index etc also have a circuit filter of 10%. If any day the index hits upper or lower circuit trading gets halted for 1 hour and then again trading starts. This is once again done to safeguard the traders. If any day market moves 20% on any side, trading is halted for the whole day.
For the reference The Nifty circuit limits are given below:
Drawbacks of upper circuit/lower circuit:
1. The first downside of circuit breakers is that it prevents actual price discovery in stock both on its way up or down, at least for the limited time period they are imposed.
2. On the other hand, they allow early investors to gain advantage and make a move before circuit breakers are eventually invoked, thereby restricting the moves of other investors, who make a move a little later in the day.
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