- Date : 11/03/2023
- Read: 4 mins
The stock exchanges tell us by establishing circuit limitations that no matter what, this particular stock cannot rise or fall by more than a certain amount in a single day.
Stock exchanges implement circuit limitations to limit a stock's daily maximum percentage fluctuation. By establishing circuit limitations, the stock exchanges are telling us that no matter what, this particular stock cannot rise or fall by more than a certain amount in a single day. The stock's volatility and the news' pace determine daily circuit limits.
In what ways do stocks reach these limits?
In this case, trading stops when a stock reaches its upper or lower boundary. What if the stock, trading at Rs. 100 the day before, reaches a high of Rs. 120? The stock market would then announce that there would be no more trading beyond this point and that the price could not increase higher than this. The same rules would apply if the stock fell to Rs 80 before reaching the lower market-wide circuit limit. The stock may decrease the next day, but the 80% maximum movement would still apply as of today.
Also read: Market commentary and insights
Circuit-limiting factors that a stock may experience
The factors of supply and demand are frequently cited as determining stock prices. You must have known at what supply and demand levels will trip the circuit. Accordingly, a stock may reach its circuit boundaries due to any occurrence that alters its attractiveness. The shift in attractiveness must be significant for a stock to hit the upper or lower circuit. Stocks may occasionally hit their upper or lower circuits due to market manipulation. The stock may hit its upper or lower circuit limit as a result of the following circumstances:
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Earnings exceeding or falling short of expectations.
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Political unpredictability
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Demands on the world stage
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Dramatic drops or increases in international stock markets can significantly impact investor confidence.
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Fluctuating interest rates
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Financial enlargement or consolidation
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Trade situation changes (trade agreements, economic zones, tariffs, etc.)
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Competitors' improved or decreased performance.
Why do we require these limits for any stock?
The stock market wants to avoid these erratic price changes, creating circuit limitations. Volatility, which may be exceedingly hazardous for individual traders and investors, is one of the significant reasons stock exchanges have circuit restrictions. The purpose of circuit limitations on stock exchanges is to lessen volatility. Many investors may have extreme trepidation if the stock goes up and down.
Over-speculation is the second cause. Many traders think they will make money if they buy equities at a given price. Massive losses are a result of this way of thinking. Circuit limitations shield traders or investors from suffering significant losses due to manipulation. The bourses prevent excessive speculation and manipulation by restricting a stock's fluctuation within a single day to a specific percentage.
How will you make the most of stock price bands and circuits?
Most investors, particularly retail ones, prefer to purchase stocks in the mid-and small-cap segments. In any case, such stocks are subject to irrational movements. These modest investors benefit from circuit filters' protection against significant losses. When you see the dynamic circuit limit moving, selling any stocks you have previously purchased is best. Low earning potential often also correlates with mild volatility. Initial Public Offering regulations provide that a company's share price might increase or decrease by 50–60% on the day it lists. On Nifty and Sensex, you have to pay close attention.
Also read: Investors long term focus on stocks
Protecting investors from excessive speculation and volatility is the primary goal of installing circuit breakers. It is ideal for a stock's price to trade between the lower and upper circuit limits when demand changes suddenly. Nevertheless, market manipulators may attempt to affect a stock's supply and demand under some circumstances. Please take into account the stock's circuit while predicting the movement of its price as an investor.
