What are the Upper and Lower Circuits?

You might have heard terms like “upper circuit” and “lower circuit” when stock prices rise or fall dramatically in the share market. But what exactly do these terms mean? Upper and lower circuits are limits set by stock exchanges to control extreme price movements within a trading session. This blog will explain upper and lower circuits, the factors that drive both, and how they work.

What is the Upper Circuit? 

An upper circuit is the highest price limit the stock exchange sets for a particular stock or index during a trading day. 

When a stock’s price rises rapidly and reaches this limit, it is said to have hit the upper circuit. This means the stock cannot be traded at a price higher than this limit for the rest of the day. 

Upper circuits are set to quickly prevent excessive price inflation, ensuring the stock market remains stable and orderly. They help control sudden, sharp movements in stock prices, protecting investors from potential risks. 

When a stock hits the upper circuit, it often indicates strong buying interest or positive market sentiment toward that stock. Upper circuits vary from stock to stock and are decided based on various factors, such as the stock’s volatility and the rules of the stock exchange.

What is a Lower Circuit?

A lower circuit is the lowest price limit the stock exchange sets for a specific stock or index during a trading day. When a stock’s price drops sharply and reaches this limit, it is said to have hit the lower circuit. 

This means the stock cannot be traded at a price lower than this limit for the rest of the day. A lower circuit prevents extreme price drops in a short period, helping to maintain order in the stock market. 

Hitting the lower circuit often reflects intense selling pressure or negative sentiment towards a stock. Lower circuits are essential in controlling the extent of price falls, protecting investors from sudden and severe losses. 

The limits for the lower circuit can differ depending on the nature of the stock and the guidelines set by the stock exchange.

What Are the Upper and Lower Circuits for Stocks? 

In the stock market, each stock has specific limits known as upper and lower circuits. These limits control how much the price of a stock can rise or fall in one day. Here’s a simple breakdown:

1. Upper Circuit: This is the maximum price a stock can reach daily. Once a stock hits this limit, trading stops for the rest of the day, helping prevent the price from rising too quickly.
2. Lower Circuit: This is the minimum price a stock can drop daily. If the price falls to this limit, trading is halted to prevent further declines, helping avoid excessive losses.

The circuit limits can vary based on the type of stock. For example, larger companies have different limits compared to smaller ones. 

These limits ensure the market remains stable and orderly by controlling extreme price changes.

What Are the Upper and Lower Circuits for Market Indices? 

Market indices like Nifty and Sensex also have upper and lower circuit limits to manage their price movements. These limits are a percentage of the index’s previous closing value.

1. Upper Circuit for Indices: This limit represents the highest level the index can reach in a single day. When the index hits this limit, trading across all stocks in the market is halted for a specific period. This pause allows investors to assess the situation and prevents excessive price jumps.
2. Lower Circuit for Indices: This limit is the lowest value the index can fall to in a day. If the index hits this limit, trading in the entire market is stopped temporarily. This helps to prevent a complete market collapse and gives investors a chance to stabilise their positions.

The stock exchanges usually set the percentage for these circuits, which can vary depending on market conditions. 

These limits are crucial for maintaining overall market stability and preventing widespread panic during extreme market movements.

What Drives the Upper/Lower Circuit? 

Several factors influence when a stock or index reaches its upper or lower circuit limits:

Market Sentiment

News about a company or economic developments can affect investor’s feelings. Positive news might drive a stock up to its upper circuit, while negative news might push it down to its lower circuit.

Economic Data

Important economic reports, such as inflation rates or employment figures, can impact stock prices. Good data might push prices higher, while insufficient data might lead to lower prices.

Company Performance

Earnings reports or changes in company leadership can influence stock prices. Strong performance or promising prospects can cause a stock to hit the upper circuit limit.

Global Events

Major global events, like geopolitical tensions or international trade agreements, can affect market prices. Significant events often lead to rapid price changes.

Liquidity and Demand/Supply

With high demand for a stock but limited supply, prices can quickly rise to the upper circuit limit. Conversely, if high supply and low demand exist, prices might fall to the lower circuit limit.

Investor Behavior

Large-scale buying or selling by institutional investors can drive prices to circuit limits. Their actions can create significant movements in stock prices.

Conclusion 

Understanding upper and lower circuits is crucial for anyone in the share market. These limits are essential in maintaining market stability and preventing extreme price movements. Knowing how they work, you can better manage your investments and make informed decisions. Keeping an eye on these circuits can help you navigate the market more confidently.