Two extreme situations can happen in the stock market. When the market is influenced by excessive optimism or pessimism, market regulators impose circuits as a measure to regulate the market. Many new traders watch in exasperation when the market hits the circuit and trading halts, not knowing the fate of their investment. If you are stuck in a situation like this, let us explain what a circuit is and what happens when the market hits either the upper or lower limit.
When a stock hits the upper or lower circuit, all trading related to that stop. It is a regulatory measure imposed by SEBI to prevent manipulations. So when a share hits the upper circuit, meaning there are only buyers in the market, no other stock trading is allowed. Similarly, all stock selling is discontinued when the share price reaches the lower circuit limit. It is a measure to safeguard traders against extreme volatility.
There are two limits in the market: the upper and the lower circuit limits. Let’s understand what they mean.
Upper & Lower Circuit Limits
The stock exchange set up a daily price band based on the last traded price to protect traders from drastic share price changes. It contains an upper and lower limit. The upper limit indicates the highest price that the stock can reach on that day. Conversely, the lower circuit sets the lowest level at which the stock price can drop on the designated day. The limits are mentioned as percentages and can have values between 2% and 20%.
The Indian stock exchange implemented index-based market-wide circuit breakers implemented in 2001. The circuit breaker raises a red flag when extreme movements occur and the index dips or rises more than 10, 15 or 20 percent.
The Indian stock market circuit breakers get triggered when BSE SENSEX and NSE NIFTY rise or dip by 10 percent, 15 percent, or 20 percent. See the table below to understand what happens when a circuit breaker is triggered.
|When are circuit breakers triggered?|
|Trigger Limit||Trigger Time||Duration of Halting Trades|
|10 percent||Before 1 pm||45 Minutes|
|At or after 1 pm up to 2.30 pm||15 Minutes|
|At or after 2.30 pm||No halt|
|15 percent||Before 1 pm||1 hour 45 minutes|
|At or after 1 pm before 2 pm||45 Minutes|
|On or after 2:00 pm||The remainder of the day|
|20 percent||Any time during market hours||The remainder of the day|
What happens to the trader’s existing position?
- When the market hits the circuit level, the exchange applies a circuit filter derived from the previous day’s closing price.
- You can find more details on circuit filters on the exchange’s website.
- In the case of circuit filters, the stock exchange will cancel all your pending orders, and your current position will remain open till you close it if there is sufficient margin available.
- In case of insufficient margin funds, your broker will square off any such position.
- If you are a new trader, avoiding stocks that frequently hit the circuit breaker levels is better. However, if you have already invested in these stocks, it is better to exit your position when they head the 5 percent circuit breaker.
What happens when the market reopens for trading?
When the market reopens, regular trading can resume as long as the market doesn’t hit the following circuit breaker.
The following table shows the stocks that have hit the lower circuit limit during today’s trading.
|Name of the Company||LTP||%Change|
|The Ramco Cement||₹646.35||-8.25|
Now that you have learned about upper and lower circuits, you can plan your trades accordingly and avoid facing a situation like this. If you like to invest in the stock market, open a free Demat account with Angel One and invest in various asset classes.
Disclaimer: “This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock”