Introduction

This article is intended to give a basic understanding of the Circuit Limits of stocks while trading. The circuit limits are the Upper Circuit limits and the Lower Circuit limits. We will also discuss how we can check the circuit limits of particular stocks and their real-life importance. Since the circuit limits are set by the market regulator, to protect the investor’s money from market fluctuations and volatility, many of us are still not aware or have a clear understanding as to what happens if our stock gets stuck in a circuit limit. We are often not sure what should be done during that time and hence we will be discussing this topic to get a clear picture of the circuit limits.

Let us first understand the meaning of the Circuit Limit.

Circuit limits are the limits set by the stock exchanges to restrict the maximum percentage movement of a stock in a single day. By setting the circuit limits, the stock exchanges are telling us that any particular stock cannot go beyond a certain percentage in a day, no matter what happens. For example, let’s take a stock which closed yesterday at Rs 100. Now the stock exchanges will set the limits for it for the next day, and the stock exchange decided that the particular stock should not go beyond let’s say 20% up and also not below 20%. So, in this case on this particular day, that particular stock will not go beyond Rs.120 on the upside limit and will neither go below Rs.80 on the downside limit. So, the upper circuit limit is set for Rs. 120 and the lower circuit limit is set for Rs. 80 for that particular stock on a particular day. Hence these circuit limits are decided daily by the stock exchanges, based on the volatility of the stock in the news flow.

What Happens When a Stock hits the Circuit Limit?

Now, let us understand what exactly happens when a stock hits this circuit limit? Trading is halted when the stock hits the upper or lower circuit limit. From the example taken above, let’s say our stock was at Rs.100 the previous day and goes all the way up to Rs. 120. The exchange at that point will say that no more trading can happen beyond this point. So, the price of that particular stock cannot go beyond Rs. 120 and the same thing goes on in the lower circuit limit as well. If the lowest circuit limit is hit on that particular day and the stock goes down to Rs. 80, the stock exchange will again say that no more trading can happen beyond this point on that particular day. This however can change the next day, that is, the next day, the stock prices can go below Rs. 80, but as of today, this is the maximum movement that we’re going to allow for this particular stock.

So let us understand how this works. For example, you can find the NSE circuit limits, by searching on Google or Moneycontrol. It is now clear that if a stock is sitting at the upper limit, you will not be able to sell that stock at that particular time. It will have only buyers and you will have to wait till it drops from that level and then you can sell or exit from the trade that day, else you will not be able to exit out of that position.

Similar will be the case with stocks sitting at lower limits that day. It will have only sellers and if a stock is sitting on its lower circuit limit, you will not be able to buy it at that particular point. However, if it rises from that point, you can get a chance to purchase that stock. In case you want to place an order for that, it will not get executed and may give different errors depending upon the broker.

How to Check the Circuit Limits?

Now, with this understanding, let’s see how we can check the circuit limits for any stock. So, we will first have to go to www.nseindia.com and search for any stock of our choice. After clicking on the stock name, you will find the circuit limit bands defined for that particular stock at the lower part of the same page. So, we just need to scroll down and you will find the lower price band and upper price band for that particular stock.

Why do we need the Circuit Limits?

Now, one of the questions that we need to answer as part of this article is that why do we need these circuit limits? What is the whole objective of having these circuit limits?

As you all must be aware of the GameStop stock, which went up from Rs 100 to Rs 500 in a couple of days and again came down to the same level in a few days. So, as we see in this case, there is a lot of fluctuation and excessive price movements in the stock in a small-time period. This situation often leads to nervousness in a lot of investors. So, the stock exchanges try to avoid these panic moments and give the investors a basic relief from market volatility.

Volatility

The real objective for the stock exchanges to have the circuit limits is volatility. So, if a stock can go up, and then come down drastically, this creates a lot of panic in investors and that kind of volatility can be very dangerous for retail investors and traders.

Excessive Speculation

The second reason is excessive speculation. As we saw earlier when a stock like GameStop goes up it will create a lot of speculation in minds of retail traders, thinking that if they buy it right now, probably they can also make money. This kind of mentality becomes the root of huge losses. So, by restricting the movement of a stock to a certain percentage within one day, they are curbing this excessive speculation. Lastly, stock market manipulation is one thing the stock exchanges have tried to avoid as we have seen a lot of stock operators who were known to create manipulation in the stock exchanges.

Are Circuit Limits the same for all Stocks?

The next question that we need to ask is that are these circuit limits the same for all the stocks? Is it fixed at 5%, 10% or 20% or what exactly is the number? Is it the same for all the stocks? The answer to this is No. The circuit limit is not the same for all stocks and they are seen in the context of 3 different categories.

1. Non-F&O Stocks – Non-F&O stocks are all the stocks that are not in the futures and options segment. There are about 200 to 300 stocks that are in the futures and options segment and the rest of all the remaining stocks, that are out there in the market belong to this category and this is the biggest category.
2. F&O Stocks – The second category is, of course, those 200 to 300 stocks that are in the futures and options segment and that is why they are called F&O stocks.
3. Market Wide – There is a special category for the market-wide circuit limits. So, we also have a circuit limit for the market, that is for the Nifty itself, that how much movement can the index itself make within a day.

Non-F&O Stocks

Now let us discuss each of them. So, let’s start with the Non-F&O stocks as over 90% of the stocks will belong to this category. So, for Non-F&O stocks, the stock exchanges have set the limit of 5%, 10% or 20% depending on the stock. Hence, if the stock is very small and is prone to manipulation, the circuit limit will be 5%, but if it’s a relatively stable stock, it can be 10%. For a bigger company, it can even go up to 20%. So, 20% is the maximum and you cannot have a stock, which is going beyond 20% if it belongs to the Non-F&O categories. Most of the stocks belong to this category and hence the maximum that they can move within a day will be 20%.

F&O Stocks

Now the second category is of the F&O stocks because, for F&O stocks, the stock exchanges don’t have a fixed circuit limit. They don’t have any circuit limits currently, and as of now what they have is a dynamic circuit limit. Now many of us would not be understanding what does it mean.

So, for that, let’s understand this with an example. So, if you take any stock, they will tell you the upper band and the lower band, but they do not have the price band. It brings confusion to investor’s minds, but in reality, as of today, stock exchanges do not have a limit of how much higher or how much lower an F&O stock can go. It can go up 50%, 60%, 70%, 80%, 90% and even 100%. The reason that they have these bands is that even though the stock goes up until this level, trade is halted for some time, and then again, the trading is resumed. So, it is more of a pause than a stop in that trade for the rest of the day.

We have seen cases of YES Bank and PC Jewellers and we have also seen cases of a lot of other stocks that have fallen, let’s say 50% to 60% within one day and have gone up 70%, 80% to even 90% in one day, but that can only happen in the F&O stocks. So, this is possible only with these stocks and it is not possible for the rest of the stocks that belong to the Non-F&O category.

Many people believe that since these stocks are in the F&O segment, the stock exchange doesn’t have the right or authority to put any circuit limit. However, it has been in the news that the SEBI has proposed circuit filters for the F&O segment as well to curb the price volatility. We have seen cases of the YES Bank and the PC Jewellers, where stocks have gone up and down too much, and that it hurt the retail traders and retail investors. So, SEBI has proposed circuit limits for these F&O stocks as well, though it has not been approved yet and is debated often. It won’t be a surprise if the SEBI puts that percentage to 20% for all the stocks, whether it be F&O or Non-F&O.

Market Wide

Now the third category, which is the most interesting one is the market-wide circuit limit. So, we are not talking about any individual stock here. There are days when the whole market, where the benchmark index that is the Sensex and the Nifty itself can go and make a move of 10% or 15%. So, the stock exchanges have certain rules when it comes to the market-wide price movement.

The guideline that they have given us is that if the market, which is either the Nifty or the Sensex for that matter, goes 10% up or 10% down before 1 pm, then the market will halt trading for 45 minutes. After that, there will be a pre-auction, similar to from 9 AM to 9:15 AM. When the market goes 10% up or down at 1 pm or between 1 pm to 2:30 pm then the market will halt trading for 15 minutes and then the same way we have 15 minutes of pre-market opening and then the market will open eventually after that time. Then when the market goes 10%up or 10% down at 2:30 or after 2:30, there will be no halt in trade and so, the same thing happens for 15% and 20% as well with a difference in the time of halt and pre-auction time.

Let us see an example, we had on May 17, 2004, when the Sensex fell 842 points, and that was the first time that the circuit limit was applied. The next time it happened, was on May 22, 2006, when the Sensex fell 842 points. This was again because of some global fears.

Listing Day of an IPO

There is one more special case that we have not covered apart from the F&O stocks, the Non-F&O Stocks and the Market Wide limits and this special category or the case is that of the listing day of an IPO. So, when a company is listed on the stock exchange, on that particular day, it doesn’t have any circuit limits. It can go up 50%, 60% and can go down for up to 60%, and the exchanges will not halt trading because that is the day when the real price discovery is happening. After the listing day, the exchanges will start putting on limits, which can be 20% or 10%, but on the day of listing, there is no circuit limit for that stock.

So, we hope that with this particular article, you’ve got a good understanding of the circuit limits, the real-life implications of having the circuit limits, why they are done, the way they are done and how that changes from Non-F&O to F&O to Market Wide. So, we hope that you’ve got a good picture of upper and lower circuit limits in this particular article.

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