In June 2021, several Adani stock stocks began hitting lower circuits. Trading was stopped to prevent any manipulation of stock prices as many investors were unsure what to do.
Although it may have seemed like a punishment to many investors, the move was actually an investor protection step.
The SEBI has established circuit breakers as an investor protection measure. Let's learn more about them and how to use them.
Let's break down our discussion into two sections. Lower and upper circuits for stocks and higher and lower circuits to indices.
Stock exchanges create a price band every day based on the stock's last traded price to protect investors from sudden price drops or price increases. The stock's maximum trading price on a given day is the upper circuit. As you might have guessed the lower circuit is the lowest price that the stock can trade on that particular day.
The stock market uses upper and lower circuits purely for investor protection.
Limits can be set at a number, represented as a percentage by the stock exchange. It could be between 2% to 20%.
Stock A is trading today at Rs 100 per share. There is a 20% circuit. This means that the share price can't drop more than 20% or increase more than 20% during the trading session. Even if the company discovers a gold mine under its office premises, the price of the shares will not change between Rs 80 to Rs 120 during the day.
Circuits can be used for individual stocks as well as an index. A circuit breaker system is used to alert you if an index falls or rises by 10%-15%, 20%, and 20% respectively. This causes trading to be halted in equity and derivatives markets.
It can last for several minutes or for the entire trading day. It all depends on how much the index is rising or falling.
Nothing really happens if an index increases or falls by 10% after 2:30pm. This can be attributed to the higher volatility at the close of trading days.
A 10% rise/fall between 1:00 PM and 2.30 PM activates a 15 minute pause in trading activity.
If it falls or rises by 10% prior to 1pm, trading activity will be halted for 45 minutes.
Trading activity will be halted if the index rises or falls by 15% after 2.30pm.
Trading activity is halted for 45 min if an index changes by more than 15% between 1:00 PM and 2:30 PM.
A 1 hour 45-minute stoppage in trading activity will be enforced if the price changes by more than 15% within 1:00 PM.
If an index shows a 20% increase or decrease, trading activity will cease for that day.
1. Circuit filters are applied to the closing price of the previous day
2. The stock exchange website has circuit filters.
3. Stocks are most often started with a 20% circuit.
4. Stocks that reach their upper circuit will have only buyers, and sellers will not be present. Conversely, stocks that reach their lower circuit will have only sellers and buyers.
5. In these cases, intraday trading is converted to delivery.
Amateur traders should avoid stocks that are frequently on their circuits, or stocks with very often revised circuits. This is an indication that the exchange is worried about trading activity related to these stocks.
It is best to sell a stock you already own if the price of the stock drops below 5%. Low earnings potential is often correlated with low volatility.
Investors could lose substantial capital in the event of unexpected swings. Circuit breakers were created to guard investors from unwelcome surprises. Circuits are not only a way to protect yourself, but they can also be a red flag for certain companies. When making price movements predictions, consider the circuit of a stock.