What is the Upper and Lower Circuit in Intraday Trading?

In the Indian stock market, circuit in share market mainly act as an investor protection measure imposed by SEBI. The lower and upper circuit breakers are mechanisms that regulate the extreme price movements of securities or stocks. Such circuit breakers, or price bands, are helpful in preventing stocks from getting oversold or overbought. This is because it could make the market conditions even more volatile than it already was. 

An Overview of Circuit Breakers

The upper and lower circuits are among the two major components in the world of trading. The upper circuit refers to the maximum percentage which increases with the stock price in a single session of trading. Contrarily, the lower circuit in share market minimum percentage reduction in the stock price of a single session of trading. 

Note that the lower and upper circuit in share market are mainly calculated depending on the previous stock’s closing price. The percentage decrease or increase is prearranged by a stock exchange, which differs from one stock to another. The SEBI, or Securities and Exchange Board of India, help to put in place the circuit filters for promoting stability in a stock market. 

All investors must be aware of a circuit filter while making any crucial investment decisions. For instance, when a stock trades closer to its upper circuit, buying a stock during this time isn’t a good idea. It increases the chances of price correction. Similarly, a stock trading close to a lower circuit in share market won’t be a suitable time to sell a stock because the price change rebound will be higher.

This blog post will provide you with a comprehensive guide to what is upper circuit and lower circuit in share market. 

What are Upper Circuits? 

Are you aware of what the stock market’s upper and lower circuits are? The upper circuit is the point at which an index’s value or a stock’s price cannot increase in a single day. Stocks that are very desirable to purchase but nearly impossible to sell may reach the upper circuit. The upper circuits are determined using the previous day’s closing price. 

Certain equities may be trading 2% higher at their upper circuits than at the previous day’s closing. The upper circuit in share market of other stocks can be 5%, 10%, or 20% higher than the closing price on the previous trading day.

In a single trading session, a stock’s price is not allowed to rise over its upper range. However, if more individuals begin to sell, the prices may drop. 

What are Lower Circuits?

Do you understand what lower circuit in share market mean? The lower circuit represents the absolute minimum that a stock’s price or an index’s value may fall to. Stocks that are in high demand for sale but in low demand for purchase may be placed on the lower circuit.

Additionally, lower circuits are determined by the closing price of the stock the day prior, which varies according to the company. 

The lower circuit for some firms maybe 2% less than the closing price on the preceding trading day. The lower circuit may be 20%, 15%, 10%, or 5% less than other companies’ most recent closing price. 

A stock’s price may not drop below its lower circuit in share market in a single trading session, but it may rise if buyers begin to purchase the shares. 

Understanding the Mechanism

Consider a situation in which an upper circuit lock is present in a stock. This indicates that the stock’s price has risen to the daily maximum allowed owing to strong purchasing demand. Investors are limited to placing purchase orders during this period; all other trading will cease until the following trading session.

In a similar vein, a stock’s price decreases when it enters the lower circuit in share market, which indicates intense selling pressure. Until the next trading session, trading in the stock remains suspended.

Upper Circuit Stocks and Lower Circuit Stocks – Implications for Traders and Investors

Upper and lower circuits may significantly impact both traders and investors. For example, the upper circuit serves as a stopgap against sudden price increases, enabling investors to assess their holdings before taking more action. Conversely, a lower circuit in share market can protect investors from suffering significant losses in the event of a steep drop in the value of a stock.

These circuit limitations may also have an impact on trading tactics. When a stock opens at the circuit limit, traders can plan to take advantage of any price fluctuations. It’s important to keep in mind, though, that NSE circuit breaker have the dual ability to prevent abrupt price swings and to temporarily restrict market access, which may have an impact on liquidity.

What Happens When Indices Hit Upper or Lower Circuit?

Trading only pauses for 45 minutes when an index, such as the NSE price band changes in Nifty or the BSE’s Sensex, increases or falls by 10% before 1 PM. Additionally, trade is only halted for fifteen minutes if this ten per cent increase occurs between 1 and 2:30 PM. However, trade does not halt, and the index is regarded as having a greater volatility index (VIX) if it increases by 10% after 2:30 PM.

Similarly, trade ceases for one hour and forty-five minutes if the index price increases or decreases by fifteen per cent before 1 PM and for forty-five minutes if this occurs after 2:30 PM. Nevertheless, trade is halted until the end of market trading hours when the market index moves 15% in any direction after 2:30 PM.

Lastly, trade is suspended for the day when the market index reaches the third NSE circuit breaker limit, which is 20%. This implies that trading will not take place that day.

Events When a Stock May Hit the Upper and Lower Circuits

Following are some events that may lead the stock to hit its lower or upper circuit in share market:

• Underperforming expectations or earnings outperforming 
• Geopolitical pressures
• Political uncertainty
• Change in interest rates
• Changes in trade scenario
• Fiscal expansion or consolidation
• Competitors outperforming or underperforming

Benefits of Circuit Breaker in the Stock Market

• When a stock’s trading ends because it crosses the circuit limit, traders have some time to consider investing.
• The waiting period also provides extra time for reflection, technical and fundamental analysis of the stock, news and corporate announcements research, and decision-making on the impact of these events on the stock price and subsequent course of action.
• If the market is operating normally and then abruptly breaks down, trading is halted because there may be a panic scenario there, and investors or traders may begin making rash purchases or sales, adding to the already tense atmosphere.

Final Thoughts

So, now you know what is upper circuit and lower circuit in share market. The purpose of circuit breakers is to safeguard investors from excessive speculation and volatility. Ideally, a stock’s price should only reach the lower and higher circuits in response to a shift in the stock’s attractiveness. However, market manipulators occasionally may attempt to affect the supply and demand for a stock. Investors need to exercise caution when making trades based only on the upper or lower circuits of equities or indexes.

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