Is it good to buy at lower circuit?

Buying at the lower circuit can be risky, as the stock is typically in a downward trend. While it may seem like a bargain, further declines or liquidity issues could occur, so caution and thorough research are advised.

Is it good to buy upper circuit share?

Buying a stock at the upper circuit can be tempting, but it may carry risks. Prices may be inflated due to speculation or short-term demand, so it's important to analyze the stock's fundamentals and market conditions before purchasing.

What happens if stock hits the upper circuit?

When a stock hits the upper circuit, trading is halted, as the price has reached its maximum allowed limit for the day. This indicates strong demand and rising prices but limits the opportunity for further trading that day.

Can I sell shares on the upper circuit?

Selling shares on the upper circuit can be challenging since there's usually more demand than supply. Buyers may struggle to find sellers, so placing a sell order early might increase the chances of successfully selling.

What happens after a 20% circuit?

After a 20% circuit limit is hit, trading is typically halted temporarily or for the remainder of the session. Exchanges may review the situation, and trading can resume once the market stabilises, depending on regulatory decisions.

What happens after a lower circuit?

When a stock hits the lower circuit, trading is halted, as the price has reached its daily lower limit. It often reflects panic selling, making it difficult to exit, and trading resumes only after the limit restrictions are adjusted.

Is it advisable to buy a stock that hits its upper circuit?

Buying stocks at their upper circuit is not necessarily a good decision in every case. Although it shows a great demand for the stock, the price might be lifted by speculation. It is a good practice for investors to consider a company's fundamentals, recent developments, and valuations before making a final decision.

Can I buy shares in a lower circuit?

A buy order can be placed when a stock hits the lower circuit, but there is no guarantee of execution. There may not be many sellers, and prices may continue to drop following the circuit breaker. Always assess the fundamentals and risks before deciding to invest in stocks trading in the lower circuit area.

What is the Upper and Lower Circuit?

The upper and lower circuits are stock market instruments that are meant to control price volatility and protect investors from sudden, irrational market movements. These circuit breakers limit the maximum rise or fall of a stock or index during a single trading day. This can happen due to events as corporate actions, political developments, or economic changes. Investors who understand these limits can better manage their risk and avoid emotional decisions, as well as identify genuine trading opportunities.

Key Takeaways

Upper and lower circuits limit extremely daily price movements to protect investors.

Circuit limits are applicable to stocks and market indices alike.

Frequent circuit hits indicate high volatility or abnormal trading activity.

Proper use of circuits leads to better entry, exit, and risk management decisions.

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 every day, 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.

The use of upper/ lower circuits in the stock market is 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 ₹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 its office premises, the price will only vary between ₹80 and ₹120.

Ways to Use Circuits on Company Stocks

There are practical suggestions which can help investors in the stock market have edge by utilizing upper and lower limits on circuit stocks of the companies.

Using Stop-loss Orders

Using stop-loss orders is one of the best ways to eliminate the risk for your investments. A preset stop-loss can automatically trigger the sale of the stock at the predetermined level, and this way, the losses might be reduced even in very bearish markets when a stock hits the lower circuit.

Monitoring the Circuits

Monitoring the upper and lower circuit limits of stocks helps you to gauge their volatility. Hitting the circuits very frequently tells about strong buy or sell forces that help investors to evaluate the risk of the given stock and make better decisions about the timing of their entry or exit.

Avoid Herd Mentality

To invest wisely, stay away from following market trends blindly. A stock that hits the upper circuit does not necessarily mean it will continue to grow; conversely, a lower circuit does not always imply the stock is weak from a fundamental point of view. Independent decision-making is of utmost importance.

Conduct Proper Research

Always take the time to understand the reasons behind the price fluctuations. Look into the earnings, debt, PE ratio, P/B ratio, the state of the industry, and shareholding patterns, and read the news related to the company to see if the circuit movement is reasonable.

Benefit from Opportunities

If the fundamentals behind a stock are strong, then a stock going down to the lower circuit may be a good opportunity to buy. On the other hand, upper circuits may be the best places to sell and take profits. The proper use of upper and lower circuit limits can enhance investment decisions.

Upper and Lower Circuits for Indices

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

The halt can last a few minutes or the remainder of the trading day. It depends on the percentage of the index's rise or fall.

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.

Factors Driving the Upper/Lower Circuits

The upper circuit or lower circuit of a company's stock can be activated by several factors. The main ones are as follows:

Political turbulence generates uncertainty, which can negatively or positively influence market mood.

Trade pact modifications that alter firms' competitiveness and trade-related profits.

Corporate restructurings that initially pump up firms or lead to their downfall, thus changing the company's growth scenario.

Monetary policy shifts, which affect the cost of money and the attractiveness of investments.

The company’s financials, one of the most critical aspects, is either profit or loss.

What Drives Upper and Lower Circuit Limits in the Stock Market?

The upper and lower circuit limits in the Indian stock market are primarily driven by demand and supply. However, several other factors can influence stock prices, pushing them to their maximum high or low limits.

Here are some key factors:

Mergers and Acquisitions: When companies merge, or one acquires another, it can either boost investor confidence, increasing demand for the stock, or create concerns, like taking on more debt, which may reduce demand.

Political Factors: Political unrest or instability can hurt investor confidence, driving stock prices down. Conversely, political stability and favorable policies can increase investor confidence and push stock prices up.

Trade Agreements: A positive trade deal can boost demand for stocks of companies benefiting from it, while an unfavorable deal can lower demand.

Interest Rates: Higher interest rates often lead to reduced borrowing and investment, lowering stock prices. Lower interest rates, on the other hand, can encourage borrowing and investment, driving prices up.

Company Performance: Strong financial performance usually attracts more investors, increasing demand for a company’s stock. Poor performance can have the opposite effect, reducing demand.

Expansion and Insolvency: Announcements of company growth or expansion can increase demand as investors expect higher future earnings. On the flip side, insolvencies or consolidations may lower demand due to concerns about future profitability.

Investor Sentiment: Positive news or outlook can boost investor confidence, leading to higher prices, while negative news can shake confidence and drive prices down.

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% or lower. Very little volatility usually also corresponds to low earnings potential.

Conclusion

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