Time to time we hear this stock has hit upper circuit OR that stock has hit lower circuit OR that stock has upper froze. So what exactly is freezing or circuit in the stock market? The market price is based on sentiments. In case of sudden news OR extreme euphoria single-sided the sentiment can become uncontrolled. The price of scrip can increase OR decrease in an uncontrolled way in case of extreme sentiments. That’s why exchange has the provision of circuit filters. In this post, I shall discuss more on upper and lower circuits and will also discuss how to trade upper circuit stocks.
What Is A Circuit In Stock Market?
A circuit in the stock market is the limit of gain OR loss in a single day for any stock. That means in a simple day the stock cannot go above or below the circuit limit. This is also called the circuit breaker in the stock market. A circuit breaker is also applied to indices apart from stocks. Circuit breaker system applies at 3 stages of the index movement – 10%, 15%, 20%. When the index circuit breaker is triggered there will be a trading halt in the stock market. This is created by the stock exchange to stop manipulation in a stock price. They fix an upper limit and lower limit on every stock.
What is Circuit Breaker?
Circuit breakers are in place for various stocks on the Indian stock market. The usual values of these are 2%, 5%, 10% or 20%. Only Stocks that are traded in the derivatives segment do not have any circuit breakers. On the Indian stock exchanges, an index-based market-wide circuit breaker system applies at all the three stages of the index movement on either side, at the 10%, 15%, and 20%. These circuit breakers, when triggered, bring about a coordinated trading halt in all equity and equity derivative markets nationwide. Market-wide circuit breakers are triggered by the movement of either the BSE Sensex or the Nifty50, whichever of the two hits the trigger first.
So when the circuit breaker triggers in any equity the trading of equity also becomes limited. In the case of upper circuit or buying freeze no further buying is allowed and in case of the lower circuit or selling freeze no further selling is allowed. The circuit breaker limit depends on the stock to stock between 5%-20%. The circuit limit also is changed based on the stock behavior. Suppose the stock is hitting 20% upper circuit every day, so after a few days the circuit will be limited to 10% by the stock exchange. Once a circuit is hit the graph becomes a straight line in intraday charts. See the image below for an example of a circuit in the stock market on Hotel Leela share.
After that, if the stock continues to move up or down at the same pace, then again the circuit is limited to 5% now. This is same as we try to tame an uncontrolled child. One thing to remember, that stock futures do not have any circuit filter and hence it is extremely risky to trade them.
Just like stocks our stock indices like Nifty index etc also have a circuit filter of 10%. If any day the index hits upper or lower circuit trading gets halted for 1 hour and then again trading starts. This is once again done to safeguard the traders. If any day market moves 20% on any side, trading is halted for the whole day.
The Nifty circuit limits are given below:
1. The first downside of circuit breakers is that it prevents actual price discovery in stock both on its way up or down, at least for the limited time period they are imposed.
2. On the other hand, they allow early investors to gain advantage and make a move before circuit breakers are eventually invoked, thereby restricting the moves of other investors, who make a move a little later in the day.
Current Updated Condition
Generally, election days and any political, extreme environmental events cause circuit in the stock market. Today loksova election is going on, so there is a chance of it. If it does not happen, investors get to see extreme volatility in the market.