What are Upper Circuit and Lower Circuit

In the stock market, upper and lower circuit limits are price bands that restrict how much a stock's price can move up or down in a single trading session. The upper circuit represents the maximum price a stock can be traded at during the day, while the lower circuit represents the minimum price. These limits are set to prevent excessive price volatility and protect investors from sharp price swings.

Circuit limits set a price range based on the previous day's closing price. If a stock hits the limit, trading halts temporarily, allowing traders to reassess before resumption.

Beginning of the Trading Day

Here’s how circuit limits are applied in a typical session:

• A stock closes at ₹100.
  

• If the upper circuit is set at +10%, the ceiling price becomes ₹110.
  

• If the lower circuit is –10%, the floor price is ₹90.

During intraday trading, once the price reaches ₹110 or ₹90, further buying or selling is paused at that limit. This allows market participants to adjust to news or sudden demand-supply shifts.

Circuit limits aid the market in several ways:

Tempering Volatility

They reduce the likelihood of a share spiralling excessively based on rumours or panic-driven trading.

Promoting Investor Protection

Sudden price changes can harm uninformed traders; circuit limits provide a buffer against emotional decisions.

Enhancing Market Integrity

By preventing extreme swings, circuit rules uphold fairness and deter manipulation.

Allowing Time for News Assessment

A price freeze gives investors a moment to analyse fresh announcements before reacting.

Different circuit mechanisms function throughout the trading day:

• Stock-level Limits
  Applied individually by exchanges, often ±5%, ±10% or ±20% depending on the category.
  

• Index-wide Limits (Market-wide Circuit Breakers)
  Triggered when a major index like NIFTY or SENSEX falls by thresholds like 10%, 15% or 20%, triggering phased trading halts.
  

• Volatility Bands
  These form part of the limit-setting methodology, adjusting based on a rolling average of daily price movements.
  

• Snap Circuit (Dynamic Circuit Breaker)
  A temporary pause—typically for 5–15 minutes—when a stock rapidly moves beyond a set percentage; trades then resume within revised price bands.

Circuit bands are displayed on trading platforms and exchange websites. Intraday charts and trading applications show live price updates and indicate when a stock is approaching or has hit a circuit.

When a Stock Hits Upper Circuit

• Buyers are unable to purchase above the peak, potentially causing trade backlogs.
  

• The move may continue beyond the band in subsequent sessions, based on the following day’s closing price.
  

When a Stock Hits Lower Circuit

• Sellers face restrictions to exit positions beyond the floor, possibly trapping distressed holdings.
  

• In severe cases, trading might remain suspended until the next trading day.
  

Strategic Implications

• Scalpers and Day Traders may need to exit positions early to avoid being stuck at circuit limits.
  

• Long-term Investors may miss short-term buying or selling opportunities but often value the protection these limits provide.

Here are some important caveats to keep in mind:

• Risk of Illiquidity
  Circuit hits can prevent trade, creating artificial stasis despite demand on the other side.
  

• Temporarily Masking True Market Sentiment
  Price freeze may delay natural price discovery and oversimplify market views.
  

• Exit Difficulty
  Traders looking to offload shares during panic markets may be unable to do so when stocks are locked at circuit floors.
  

• Emotional Amplification
  For retail investors, seeing a fast circuit-hit price may induce stress-driven decisions without full context.

Here’s how to navigate these situations effectively:

• Monitor Key Levels
  Frequent use of live charts and alerts allows early action when prices near circuit thresholds.
  

• Adjust Expectations
  Don’t rely on rapid exit during extreme volatility; structured exits may be delayed or impossible.
  

• Maintain Margin Prudence
  Avoid over-leveraging stocks prone to circuit risk.
  

• Understand Sectoral Vulnerabilities
  Certain sectors—like banking, PSU, or small-caps—tend to hit circuits more frequently during news-driven sessions.
  

• Examine Multiple Days
  Look beyond intraday volatility to assess whether a circuit hit is a temporary spike or part of a larger trend.

Circuit mechanisms vary globally:

• India (NSE/BSE): Stocks commonly have ±5% to ±20% bands; index-wide halts at ±10%, ±15%, ±20%.
  

• US Markets: Use market-wide circuit breakers based on index drops, but individual stock trading halts differ.
  

• European Markets: Feature volatility interruptions but have fewer daily circuit rules than Indian exchanges.

In India, tight limits aim to stabilise a market with many retail participants, while mature global markets tend to rely more on price discovery mechanisms and fewer daily caps.

Upper and lower circuit limits maintain market stability by preventing panic trading. While they can restrict quick exits, sensible trading with alerts, avoiding over-leverage, and understanding market dynamics helps navigate circuit hits.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.