Indian Stock Markets celebrated the winning of Congress led UPA in the 2009 Parliamentary election, by breaking all past records and forcing the regulator to halt the trading for the day. It is being considered that the main reason for such a bounce is the expectations of stable economy after the UPA is coming in the center. The expectations were so high that it created a world-wide record and made BSE SENSEX as the index with highest one-day percentage gainer across the world.
Many don’t agree, but this is the time when all analysis whether fundamental or technical fails. While Fundamental analysis include analyzing annual reports, growth patterns etc., Technical analysis is all about looking at various graphs and understanding the trend of the market. This is the time when the expectations and speculations of the people drive the market, which cannot be estimated by the any such analysis.
Timeline – 18 May 2009
9.55 am – Market opens
9.56 am – S&P CNX NIFTY crosses the 15% threshold, and thus Trading halted for 2 hours
11.55 am – Trading suspended for the entire day, as the 20% threshold level is breached
BSE SENSEX – 14284.21 (2110.79 points up)
S&P CNX NIFTY – 4323.15 (651.15 points up)
The newspapers on 19th May, were full of headlines like “Supersonic Sensex flies into a circuit”, and words like “upper circuit” etc. But the question arises what actually is a ciruit? what is an upper circuit? This article helps in answering such questions.
What is a circuit?
When any index or a stock makes a move in any direction from more than the specified percentage (%), then it is said to have entered into a circuit or breaking a circuit. This specific percentage has been mentioned by the regulator (SEBI) and is calculated above the previous close. Generally, the reason behind such a move is heavy speculation – either about the economy or about a particular stock.As there are two directions of movement (up and down), therefore there are two types of circuits possible – upper circuit and lower circuit. The names clearly define their respective meanings.
What is a circuit breaker?
In order to control the speculations that is causing the stock or index to enter in a circuit, SEBI has formed rules (different for index and stocks) which help in controlling the situation. These rules are commonly referred as Circuit breaker, as they are used by the regulator (SEBI) to break the circuit and bring the market to its normal levels.
Circuit breaker for an Index
SEBI passed a circular forming a method, to be used when any index enters into a ciruit (both upper and lower). This circular marked the implementation of the rules from July 2001, but it is only now that the exchanges got an opportunity to use this method in case of an upper circuit. As per this method, the trading at the exchange is halted for some time, in-order to allow the market to cool down. The trading can be stopped for a time span ranging from 1/2 an hour to the entire day, depending on the time and the percentage movement.
Point to note is that the circuit breaker is practiced, when either of the major stock indices (BSE SENSEX or S&P CNX NIFTY) breach the threshold levels.
The method can be read in detail at Circuit Breakers
Circuit Breaker (Price band) for a stock
In case of a stock, circuit breaker is more commonly referred as Price bands. As the name suggests, it specifies the band within which the price of a particular stock can move freely. Once the price breaches the mentioned levels, it enters into a circuit – Lower circuit on breaching the lower price level, and upper circuit on breaching upper price level.
The price limits for NSE can be checked at NSE price limits. The limits are listed in an excel sheet and are updated daily.
The daily price limits for a stock listed at BSE is mentioned on the quote page under the tab “Circuit limits”. An example is shown below (figure 1).
While the upper circuit benefits those who have already invested in the particular stock or the market. But lower circuit being completely opposite, badly affects those have already invested in the market. This is because after a stock enters a lower circuit, it becomes difficult for the investor to sell the shares and recover the blocked money.