You know that listed stocks are traded in the stock market. Investors invest money in it. To protect investors from sudden huge losses or huge profits and to control the market volatility, the stock exchanges fix a limit for a particular stock or share. Upper circuit is used to control the upward movement in the shares and lower circuit is used to avoid excessive movement at the lower level. Overall, upper circuit and lower circuit are fixed to avoid excessive change in the share price in a day.
What is upper circuit?
The upper circuit in the stock market is the level of the maximum price that stocks or securities can achieve on any trading day. It is a limit that the stock exchange sets to prevent very large price increases. If the price of a stock touches such an upper limit, then for the rest of the day, no trading crosses this level, and trading on that particular stock may be halted for some time. During this time, no one can buy or sell that stock above the set limit for the rest of the day. According to ICICI Direct, the upper circuit helps protect the market from unexpected, sharp increases in prices. Such a surge can be seen due to speculation, rumours or surprising news. These limits are imposed by stock exchanges to protect stability and fairness in the market, so investors are protected from excessive risk caused by sudden price changes.
What is a lower circuit?
The lower circuit is the minimum price to which a stock can fall in a single trading day. This limit is set by the stock exchange in lieu of excessive fall in the prices of any stock. When the price of a stock reaches this limit, it may not fall further for the rest of the day, and trading in that stock may be halted for some time. For example, a stock is trading at Rs 100. The lower circuit limit set by the stock exchange is 10%. That is, the stock can fall to a minimum of Rs 90 on that day. If the stock price reaches Rs 90, it will be a lower circuit. Trading may stop and no one will be able to buy or sell that stock below Rs 90 for the rest of the day. The lower circuit protects the market from potential panic selling, bad news or market rumours, which may result in large and unexpected price drops. The lower circuit will ensure that the fall in the stock happens in a controlled manner.
Profits and losses of upper circuit and lower circuit
According to ICICI Direct, if we talk about the advantages, then halting trading restores orderly trading conditions and there is no panic among investors. It provides investors with enough time to digest the news and take sensible decisions. This gives investors full confidence that the market is fair and reliable for investment. While talking about its disadvantages, it can cause confusion about the real value. When there is a limit on prices, liquidity in the stock can be disrupted, resulting in difficulty in buying or selling stocks in a volatile market.
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