If you are new to the world of share market, you may have come across the terms “upper circuit” and “lower circuit”. These terms refer to the price limits set by the Securities and Exchange Board of India (SEBI) for trading in the stock market. In this article, we will explain what upper and lower circuits are, how they work, and the rules set by SEBI regarding these circuits.
Understanding Upper and Lower Circuits
What are Upper and Lower Circuits?
Upper and lower circuits are price limits set by SEBI to regulate the trading of stocks in the stock market. These limits are set to prevent excessive volatility in the market and to protect investors from sudden price movements.
An upper circuit is the maximum price at which a stock can be traded in a day. Once a stock reaches its upper circuit, it cannot be traded at a higher price for the rest of the day. Similarly, a lower circuit is the minimum price at which a stock can be traded in a day. Once a stock reaches its lower circuit, it cannot be traded at a lower price for the rest of the day.
How are Upper and Lower Circuits Calculated?
The upper and lower circuits for a stock are calculated based on its previous day’s closing price. The percentage of the circuit is determined by the stock’s price band, which is set by SEBI. The price band is the range within which a stock can be traded in a day.
For example, if a stock has a price band of 10%, its upper circuit will be 10% higher than its previous day’s closing price, and its lower circuit will be 10% lower than its previous day’s closing price.
SEBI Rules for Upper and Lower Circuits
SEBI has set certain rules and regulations regarding upper and lower circuits to ensure fair and transparent trading in the stock market. Let’s take a look at some of these rules.
Circuit Limits for Different Market Segments
SEBI has set different circuit limits for different market segments. For example, the circuit limit for stocks in the “A” group is 20%, while the circuit limit for stocks in the “B” group is 10%. This means that stocks in the “A” group can have a maximum upper or lower circuit of 20%, while stocks in the “B” group can have a maximum circuit of 10%.
Revision of Circuit Limits
SEBI has the authority to revise the circuit limits for stocks based on market conditions. If there is excessive volatility in the market, SEBI may revise the circuit limits to prevent any further price movements. This is done to protect investors from sudden price fluctuations and to maintain stability in the market.
Removal of Circuit Limits
In certain cases, SEBI may remove the circuit limits for a stock. This is usually done for stocks that are highly liquid and have a large market capitalization. By removing the circuit limits, SEBI allows for more flexibility in trading these stocks, which can lead to better price discovery.
Impact of Upper and Lower Circuits on Investors
Advantages of Upper and Lower Circuits
Upper and lower circuits have several advantages for investors. They help prevent excessive volatility in the market, which can be beneficial for long-term investors. These circuits also protect investors from sudden price movements, which can cause significant losses.
Moreover, upper and lower circuits help maintain stability in the market, which is crucial for the overall health of the stock market. By preventing extreme price movements, these circuits ensure that the market remains fair and transparent for all investors.
Disadvantages of Upper and Lower Circuits
While upper and lower circuits have their advantages, they can also have some disadvantages for investors. For example, if a stock reaches its upper circuit, investors may not be able to sell their shares at a higher price, even if the stock’s actual value is higher. This can lead to missed opportunities for profit.
Similarly, if a stock reaches its lower circuit, investors may not be able to buy shares at a lower price, even if the stock’s actual value is lower. This can lead to missed opportunities for buying stocks at a discounted price.
Conclusion
Upper and lower circuits are an essential aspect of the stock market, and they play a crucial role in maintaining stability and fairness in the market. By setting price limits for stocks, SEBI ensures that investors are protected from excessive volatility and sudden price movements. As an investor, it is important to understand these circuits and their impact on your investments. By staying informed and following SEBI’s rules, you can make informed decisions and navigate the stock market with confidence.
