• Upper Circuit and Lower Circuit

    As we know that the share price is determined by the trading between the buyers and sellers. The last trade price is the best bid price (highest buy price) and the best ask price (lowest sell price). This can lead to an abrupt increase or decrease in the share price without proper number of buyers or sellers or very low liquidity.

    Absence of buyers or sellers can lead to very high decrease or increase in the share price because of much higher supply (only sellers) or much higher demand (only buyers) in the market. To protect the shares from very high movement in either side, circuit filters are introduced by the exchange which acts a floor or cap in the share price downward or upward movement.

    Upper circuit happens when there are no sellers for a particular share or only buyers are there. At that time buyers are ready to buy share at any price which leads to a very high increase in the share price. This happens when there is some every good news or rumors in the market or artificially the buyers are pushing the price. Because of the upper circuit the share price cannot go above the upper circuit limit price on a particular day. The upper circuit filter is mainly set at 5%, 10% or 20% level which varies for different shares and with time.

    Suppose a share is now trading at Rs. 90 and the upper circuit is set at 10%. Because of some good news and the prospect of the company, there are only buyers in the market who are even willing to pay Rs 150 to get the share and some sellers are ready to sell the shares at more than Rs 120. But because of upper circuit that share can be traded at the maximum price of Rs 99 for that particular day.

    Lower circuit happens when there are no buyers for a particular share or only sellers are there. At that time sellers are ready to sell the share at any price which leads to a very high decrease in the share price. This happens when there is some every bad news or rumors in the market or company files for bankruptcy. Because of the lower circuit the share price cannot go below the lower circuit limit price on a particular day. The lower circuit filter is mainly set at 5%, 10% or 20% level which varies for different shares and with time.

    Suppose a share is now trading at Rs. 90 and the lower circuit is set at 10%. Because of the bankruptcy filing news, there are only sellers in the market who are even willing to sell Rs 50 to get rid of the share and some buyers are ready to buy the shares at more than Rs 60 with the hope takeover by some big company. But because of lower circuit that share can be traded at the minimum price of Rs 81 for that particular day.

    Upper and lower circuits are not applicable for shares which are traded in the F&O segments. All the shares traded in the F&O (Futures and Options) segment normally have sufficient liquidity and do not face the situation like only buyers and sellers in the market.

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