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Indian Stock market.. Upper circuit! Whats that?

upper-circuit

Introduction

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

End result

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).

Fig. 1: Example of a stock (ADHUNIK) listed on BSE SENSEX

Fig. 1: Example of a stock (ADHUNIK) listed on BSE SENSEX

Consequences

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.

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28 Responses

  1. Hi Rohan! Great article on a topic on which not much information available on internet. Could you please also clarify the following: -

    (a) Who fixes the price band and revisions therein (SEBI or Stock Exchnages)?

    (b) What is the rule for revising a price band from 20% to 10% and from there to 5% and from there to 20% again? Is there any thumb rule for the same?

  2. hi rohan, can u tell me from where can i find about the rules of circuit filters in detail…for both nse and bse

    • Hi Amar

      I couldn’t get hold of any such site which explains both the rules in detail. This is one of the reasons I wrote this article.

      I’ve anyways mentioned the links for both NSE and BSE rules in the article. If you require anything else, please let me know.

      Rohan

  3. hey buddy..

    nice article..

    it will be good if you give some examples on this. considering some assumed thresholds.

    keep going buddy..

    enjoy..bye..

    • Thanks for the comment Sujan and sorry for replying so late. I’ll soon put an example in the comments section.

      take care

      Rohan

    • Hi Sujan,

      Refer to the example of Adhunik metals, for which I’ve given the snapshot of the scrip (at BSE) in the article. The upper limit and lower limits are given as 58.4 and 52.9 respectively. So once the stock either rises above the 58.4 level or falls below the 52.9 level, it enters into a circuit.

      I hope this is what you wanted. If you require anything else, please let me know.

      Rohan

  4. A vry lucid and simple article which will help a layperson to understand about circuit breaker………GREAT JOB!!!!!!!

    THNX!

  5. helo dear,

    i would like to circuit limits in detail. can u frwd it on mail
    i will b thankfull to you

    • Hi Tarun,

      Sorry for the late reply. I couldn’t get your question. You want to understand circuit limits in detail? Whatever I knew I’ve tried to include in my article. But if you any specific queries, then please let me know.

  6. Hi Rohan, It was a great article from you. Thank!
    I am having one question quiet related to ALLIRI’s question.

    I have seen some of the Stock scripts which were not having Price Band (circuit limit). But later Price band is been introduce to it.

    My question is – on what criteria they will impose price band to script? How long this band is applicable? On what criteria this price band will be removed for specific stock?

    It will be great help if you answer this question.

    Regards,
    Vedika

    • Hi Vedika,

      Sorry for the late reply and thanks for the comment.
      You would have gone through the link that I’ve mentioned in my article regarding daily price limits at NSE. That particular link will give you a list of the circuit limits for all the stocks listed at NSE. This price limit actually depends on the market cap of the company, and is decided by SEBI.
      A stock can have no price limit only when derivative products for the same are available.

      If you require any further clarification, then please let me know.

      Rohan

  7. Hi sharma
    Gud evining,
    pls clarify my doubts.
    how to deside upper circuit percentage?
    for example.
    today
    Gujarat NRE Coke Ltd. price band is 5%. how it calculate and how many days this price band is same.

    • Hi Mr. Varma

      You never have to decide the price band, as that is the job of SEBI. In my article, I’ve mentioned a link that gives the price limit of all the stocks listed at NSE. These price limits are updated on a daily basis. The price band actually depends on the market cap of the company.

      If you have any other queries, please let me know.
      Thanks for the comment.

      Rohan

  8. I have one question… is the circuit limit (% movement) is fixed or variable. I have seen the circuit at 20%, sometime 10% and 5%…. if its variable how sebi decides it.

    • The threshold levels are fixed – as 20%, 10% and 5%.
      These percentage values are converted into absolute points on quarterly basis. This absolute value is the percentage of closing level of the index on the last trading day of the quarter.

      • WOW!! THE BEST ARTICLE I HAVE READ RECENTLY.
        THANKS A LOT. CAN YOU PLEASE SEND ME SOME FILES REGARDING BASICS OF INVESTING STOCK MARKETS!! PLEASE!!
        montop3@gmail.com

        • Thanks a lot rahul for the encouraging comments.. sorry for the late reply, i’ve been travelling from some time and thus couldn’t access the net.. as such i’ve no files Tht can help you in investing.. but i think i’ve a better option.. you can direct your queries to me and i’ll be happy writing bout it as one of my articles..

  9. Hi Rohan,

    Your article is simple and easy to understand. Thanks for sharing the information. We are awaiting for more articles from you.

    Regards
    Karthiganesh

    • Thanks Karthiganesh. I’ll continue writing about such ideas.
      If you have any other terms that you want to discuss, please let me know; and I’ll try and write about it.

  10. You have managed to articulate this in a simple manner. Great job, keep the good work.

  11. Hey Rohan ,

    You have written a great article indeed. On the day,I was seeing just the headlines of the newspapers highliting the term ” UPPER CIRCUIT ” but couldn’t really understand it. Now I have got the meaning of this term.
    Thanks.

    • @ Bhavya – Thanks. I’m happy that the article proved of some help.
      If you have any other terms that you want to clarify or discuss, please let me know. I don’t know enough but I’ll try and write about it. :P

  12. This is the first time I got the meaning of UPPER CIRCUIT. Great article. Easy to understand.