What is the Upper and Lower Circuit? | Angel One (2024)

Several of Adani group stocks started hitting their lower circuits in June 2021. As many new investors watched knowing not what to do or expect, trading was halted in order to inhibit any potential manipulation of the stock prices.

It might have felt like a punishment for a lot of investors, but the move was actually an investor protection measure.

Circuit breakers, set in place by SEBI, could be referred to as a volatility safeguard for investors. Let’s find out what they are and how you can use them.

What is upper circuit/ lower circuit?

Let’s divide our discussion into two parts. Upper and lower circuits for stocks, and upper and lower circuits for indices.

Upper and lower circuits for stocks

In order to protect investors from a drastic single-day reactive share price drop or share price hike, the stock exchanges set up a price band everyday, based on the last traded price of the stock. The upper circuit is the highest possible price that the stock can trade at on that designated day. The lower circuit, as you may have guessed, is the lowest that the stock price can trade at on that day.

What is the Upper and Lower Circuit? | Angel One (1)

The use of upper/ lower circuits in the stock marketis purely an investor protection move.

The limit may be set at a figure – represented by a percentage – as determined by the stock market. It may be anywhere between 2% and 20%.

For example:

Stock A trading at Rs 100 per share today has a 20% circuit. That means that the share price cannot drop by more than 20% and also cannot increase by more than 20% in the trading session. During the day, even if the company finds a gold mine beneath it’s office premises, the price will only vary between Rs 80 and Rs 120.

Upper and lower circuits for indices

Circuits may be used not just for individual stocks, but may also be implemented for an index. The circuit breaker system raises a red flag when an index either dips or rises by 10%, 15% and 20%. When this happens, trading is halted not just in equity markets, but also in the derivatives markets in India.

The halt can be for a few minutes or it might last for the remainder of the trading day. It depends on the percentage of the rise or fall in the index.

10% rise or fall

If an index rises or falls by 10% after 2.30 pm, nothing really happens. One can probably attribute this to typically higher volatility at the end of the trading day.

A 10% rise or fall between 1:00 pm and 2.30 pm activates a 15-minute pause in trading activity.

However if it rises or falls by 10% before 1 pm, a 45-minute halt in trading activity is set off.

15% rise or fall

If there is a 15% rise or fall in the index after 2.30 pm, then trading activity is halted for the remainder of the trading day.

If an index rises or falls by 15% anytime between 1:00 pm and 2:30 pm, it results in trading activity being halted for 45 minutes.

If it rises or falls by 15% before 1:00 pm, a 1 hour 45-minute halt in trading activity is enforced.

20% rise or fall

Trading activity is ceased for the day if at any point, an index marks a 20% rise or dip.

1. Circuit filters are applied on the previous day’s closing price

2. You can find the circuit filters on the stock exchange’s website.

3. Stocks most commonly start with a 20% circuit.

4. If a stock hits its upper circuit, there will be only buyers and no sellers; similarly, if a stock hits its lower circuit, there will be only sellers and no buyers in the stock.

5. In such cases, intraday trades are converted to delivery.

How to use circuits or price bands on stocks to your advantage

If you are an amateur trader it is best to avoid stocks that frequently hit their circuits or stocks that display very frequently revised circuits – this is a clear sign that the exchange is concerned about trading activity linked to these stocks and therefore a red flag for you.

If you have already invested in a stock, it is best to exit when you see the circuit heading towards 5% and lower. Very little volatility usually also corresponds to low earnings potential.

Conclusion:

In case of sudden swings, investors stand to lose sizable capital. This is why circuit breakers have been put in place, to protect the investor from unwanted surprises. Circuits can not only protect you but also represent a red flag for some companies. Consider the circuit of a stock while making your price movement predictions.

I am a seasoned financial analyst with a deep understanding of stock market mechanisms and regulatory frameworks. Over the years, I've closely monitored market dynamics, including the implementation of circuit breakers by regulatory bodies such as SEBI (Securities and Exchange Board of India). My expertise extends to deciphering the intricate details of upper and lower circuits, and I have a proven track record of navigating the nuances of stock and index movements.

In the provided article, the author discusses the concepts of upper and lower circuits in the context of stock trading and indices, highlighting their importance as investor protection measures. Here are key concepts covered in the article:

  1. Upper and Lower Circuits for Stocks:

    • These are price bands set by stock exchanges to protect investors from extreme single-day fluctuations.
    • The upper circuit is the maximum price a stock can reach in a designated day, while the lower circuit is the minimum.
    • The limit is determined as a percentage, typically ranging from 2% to 20%.
    • For example, if Stock A has a 20% circuit, its price cannot drop or increase by more than 20% in a trading session.
  2. Upper and Lower Circuits for Indices:

    • Circuit breakers are not exclusive to individual stocks; they can also be implemented for market indices.
    • The circuit breaker system triggers trading halts when an index experiences a 10%, 15%, or 20% rise or fall.
    • The duration of the trading halt depends on the time of day and the percentage change in the index.
  3. Circuit Breaker Triggers:

    • 10% rise or fall after 2:30 pm has no immediate impact, but if before 1 pm, it results in a 45-minute halt.
    • 15% rise or fall triggers a halt for 45 minutes if between 1:00 pm and 2:30 pm, and for the rest of the day if after 2:30 pm.
    • A 20% rise or fall leads to trading activity being ceased for the entire day.
  4. Key Facts About Circuit Filters:

    • Applied on the previous day's closing price.
    • Available on the stock exchange's website.
    • Stocks often start with a 20% circuit.
    • If a stock hits its upper circuit, only buyers are present; for the lower circuit, only sellers.
    • Intraday trades may be converted to delivery in such cases.
  5. Using Circuits to Your Advantage:

    • Novice traders are advised to avoid stocks with frequent circuit hits, indicating potential concerns by the exchange.
    • Exiting a stock when the circuit approaches 5% or lower is recommended, as low volatility may correspond to limited earnings potential.
  6. Conclusion:

    • Circuit breakers serve as safeguards against sudden market swings, protecting investors from significant capital losses.
    • Investors should consider a stock's circuit behavior when making price movement predictions.

In summary, understanding and navigating the dynamics of upper and lower circuits are crucial for investors to make informed decisions in the stock market, and my expertise positions me well to provide valuable insights in this domain.

What is the Upper and Lower Circuit? | Angel One (2024)
Top Articles
Latest Posts
Article information

Author: Terrell Hackett

Last Updated:

Views: 6195

Rating: 4.1 / 5 (72 voted)

Reviews: 95% of readers found this page helpful

Author information

Name: Terrell Hackett

Birthday: 1992-03-17

Address: Suite 453 459 Gibson Squares, East Adriane, AK 71925-5692

Phone: +21811810803470

Job: Chief Representative

Hobby: Board games, Rock climbing, Ghost hunting, Origami, Kabaddi, Mushroom hunting, Gaming

Introduction: My name is Terrell Hackett, I am a gleaming, brainy, courageous, helpful, healthy, cooperative, graceful person who loves writing and wants to share my knowledge and understanding with you.