What Is Circuit In Share Market: The stock market is an unpredictable, constantly-evolving environment that can be influenced by a wide variety of factors. To maintain stability and protect investors, various mechanisms and regulations are in place.
One such mechanism is the circuit, which plays a crucial role in controlling extreme price movements and ensuring fair trading practices. In this article, we will explore the concept of a circuit in the share market, its significance, and its impact on market participants.
The share market, also known as the stock market or equity market, is a platform where individuals and institutions trade shares of publicly listed companies. It provides opportunities for investors to buy and sell securities, aiming to profit from the price movements of stocks. However, the share market is not immune to sudden and drastic price fluctuations that can be detrimental to investors. To mitigate such risks and maintain market stability, circuit mechanisms are employed.
In the context of the share market, a circuit refers to a predetermined percentage change in the price of a security that triggers a temporary halt in trading. When the price of a security breaches the circuit limit, trading is halted for a specified duration.
This pause in trading allows market participants to reassess their positions and prevents panic selling or manipulative activities. Circuit mechanisms act as a circuit breaker, intervening in times of excessive price movements to safeguard market integrity.
There are two types of circuits in stock market Upper and Lower.
Upper Circuit
An upper circuit is the maximum allowable price movement for security in a single trading session. When the price of security hits the upper circuit, further upward trading is halted temporarily.
An upper circuit can occur when there is significant buying interest or positive news surrounding a particular security. It prevents the price from skyrocketing too rapidly, allowing market participants to reassess their positions and potentially sell at higher prices if they choose to do so. The upper circuit acts as a temporary ceiling, limiting excessive price escalation and maintaining market stability.
Lower Circuit
On the other hand, a lower circuit is the minimum allowable price movement for security in a trading session. When the price of a security hits the lower circuit, trading is temporarily halted in the downward direction. A lower circuit helps prevent excessive selling pressure and sharp price declines that may be triggered by negative news or market sentiment.
The lower circuit provides a temporary floor for the price of a security, preventing it from dropping too quickly. It allows investors to reassess their positions, evaluate market conditions, and potentially buy at lower prices if they deem it appropriate. The lower circuit acts as a safeguard against rapid and unwarranted price erosion, promoting market stability and investor confidence.
Circuits are implemented through circuit filters, which are pre-defined limits set by the stock exchange or regulatory authorities. These filters can be based on a fixed percentage change or a fixed price deviation from a reference price. When the price of a security reaches or exceeds the circuit limit, a circuit breaker is triggered, leading to a temporary halt in trading. The duration of the trading halt may vary based on the severity of the price movement.
Circuit mechanisms are designed to address two key aspects: price volatility and investor protection. By imposing temporary trading halts, circuits help control excessive price volatility, ensuring that price movements remain within a manageable range.
Additionally, circuits protect investors by creating a pause that allows them to assess new information, avoid knee-jerk reactions, and make informed decisions.
Top 15 facts Of Upper circuit and lower circuit
- Upper and Lower circuit are terms used in the stock market to limit a stock’s price movement on a trading day.
- The Upper circuit is the maximum limit for a stock’s price rise in a single trading session, while lower circuit is the maximum limit for its price fall.
- These limits are set by stock exchanges to maintain market stability and prevent excessive volatility.
- When a stock reaches the Top circuit, trading in that stock is temporarily halted.
- This pause allows investors to reassess their positions and prevents rapid price escalation.
- Similarly, trading is suspended when a stock hits the lower circuit to prevent panic selling and provide evaluation time.
- Circuit limits are calculated as a percentage of the stock’s reference price.
- The reference price is based on the stock’s previous closing price.
- Stock exchanges periodically adjust the circuit limits to adapt to changing market conditions.
- Stocks that frequently hit the upper circuit attract significant investor attention and may experience increased volatility.
- Conversely, stocks frequently touching the lower circuit may indicate underlying issues or cautionary signals.
- Circuit limits are crucial for illiquid stocks with low trading volume to prevent manipulative practices.
- Stocks can reach the upper or lower circuit multiple times in a single trading session, causing extended halts.
- The duration of the halt during a circuit limit varies based on exchange rules, ranging from minutes to the entire trading day.
- Upper and lower circuit limits provide valuable insights for traders and investors, helping them assess market sentiment and make informed decisions.
Conclusion
After reading this article, you must have understood what the upper and lower circuit are and how they work, and if you face any problem related to the share market, then you can ask us as well as from the stock market You will find many related articles here.
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FAQ
Q.1 What happens when a share hits circuit?
A.1 When a share hits a circuit, trading in that share is temporarily halted to prevent excessive volatility. It allows investors to reassess their positions and reduces the risk of panic selling or buying. Trading resumes after a specified period, typically a few minutes, at a price determined by the market.
Q.2 Can we buy or sell shares in circuit?
A.2 No, buying or selling shares is not possible when a share is in circuit as trading is temporarily halted. Investors can only place orders, which are executed when trading resumes after the circuit breaker period.
Q.3 Is it good to buy at lower circuit?
A.3 Buying at a lower circuit can be advantageous if you believe in the long-term potential of the stock. However, it carries risks as the price could continue to decline. Conduct thorough research and consider factors such as fundamentals, market conditions, and the company’s prospects before making any investment decisions.
Q.4 Is Upper circuit good or bad?
A.4 An upper circuit can be seen as both good and bad. It is good for existing shareholders as it indicates a surge in demand and potential price appreciation. However, it can be challenging for new buyers to enter the market at a fair price due to limited supply and liquidity.
Q.5 what is Upper circuit in share market?
A.5 In the share market, an upper circuit refers to a price limit set by the stock exchange to prevent excessive price volatility. When a stock hits the upper circuit, trading in that stock is temporarily halted, and investors can only place buy orders. It indicates a surge in demand and limits the stock’s price increase within a specified period.
Q.6 Are circuit breakers the same in every country?
A.6 Circuit breakers can vary between countries. While the purpose is generally to control excessive volatility, the specific rules, thresholds, and durations of circuit breakers can differ based on the regulations and practices of each country’s stock exchange or regulatory authority.
Q.7 Can circuit breakers prevent stock market crashes?
A.7 Circuit limits aim to prevent excessive price movements and maintain market stability. While they can help mitigate the impact of sudden market declines, they cannot completely eliminate the possibility of market crashes.
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