what is upper circuit in share market
Upper Circuit refers to the maximum limit up to which the price of a particular stock can increase in a single day. This limit is determined by the stock exchange and is set at a predefined percentage.
Also read : What is pledging of shares
Why is the Upper Circuit Set?
The main purpose of the upper circuit is to control excessive and abnormal price fluctuations and to protect investors. When there is a sudden surge in demand for a stock in the market (such as due to good news or rumors), everyone wants to buy that stock, causing the price to rise rapidly. To prevent such abnormal increases and maintain market stability, the concept of the upper circuit is applied.
How Does It Work?
The stock exchange determines an Upper Circuit Price for each stock based on its previous day’s closing price. This percentage usually ranges from 2% to 20%, depending on the stock’s category and volatility.
If the price of a stock reaches its upper circuit limit during trading hours, trading in that stock is automatically halted. After hitting the upper circuit, generally only sellers can place orders (if buyers are available), but no new buying orders can be placed, as the stock has reached its maximum price for the day. As a result, the stock price cannot go any higher.
After a specified time (which can be a few minutes or the rest of the day as per exchange rules), trading may resume, but the price will not go above the upper circuit level.
In Summary
The Upper Circuit is a daily price limit on the upward movement of a stock’s price. It helps prevent sudden price spikes, protects investors, and maintains order in the market.
Is This Limit Set Every Day for Every Stock?
Yes, in general, every listed stock on Indian stock exchanges (like NSE and BSE) has both upper and lower circuit limits set daily. These limits are calculated based on the previous day’s closing price and are set before the market opens each day.
However, there are some exceptions:
-
Stocks under derivatives trading (Futures & Options) may not have circuit limits, or the rules may differ.
-
Based on market capitalization or volatility, circuit percentages can vary. Some stocks may have limits of 2%, 5%, 10%, or 20%.
But as a general rule, most stocks are subject to circuit limits daily to protect them from excessive price movements. These limits are published daily on the stock exchange websites.
What Happens If the Price Doesn’t Reach the Circuit Limit?
If a stock’s price does not touch its upper or lower circuit limit during the trading session, trading continues normally.
In other words, if the circuit limits are not hit, then no automatic trading halt or restriction takes place. The stock’s price will continue to fluctuate within the set circuit range based on supply and demand throughout the day.
To put it simply, circuit limits are like maximum and minimum boundaries. As long as the price stays within those boundaries, the market operates as usual. Circuit breakers only activate when the price hits these extreme points.
Also read : what is book value of share
