Upper Circuit

In the stock market, the prices of stocks fluctuate and move freely. But what if there is an indefinite rise of price in the stock market? To prevent this, there are circuit breakers like the lower circuit and upper circuit.

Here, the upper circuit in shares defines the maximum limit up to which the stock price can rise. 

In all the circuit limits in the stock market come to rescue or prevent unexpected losses. 

Here we will discuss in detail the meaning, limit, duration of the upper circuit. Also, by the end, the potential trader will be able to know how they can benefit themselves from the upper circuit by trading shares in that upper range strategically. 

What is Upper Circuit?

In simple terms, it is the upper price limit of stocks set for a particular share for a day beyond which its price cannot increase. 

The stock exchange (NSE, BSE) generally makes use of these circuit breakers to avoid any kind of manipulation in the stock market. 

But these upper circuits are not applicable for the commodity or currency derivatives i.e. for stocks generally traded in Futures and Options as there is no limit to the rise of these stocks in a particular trading session. 

The value of the Upper circuit depends upon the closing price of the previous day and thus it changes regularly. 

It has different limits like 2%, 5%, 10%, 20%.

To understand this let’s take an example. Suppose the closing price of Asian Paints is ₹300. Now when the market opens the next day with the upper circuit limit of let’s say 20% then the stock price cannot move beyond ₹360 (20%*300). 

Here ₹360 is the upper circuit of the stock. 

In general, the stock hits the upper circuit only when there are more buyers than sellers. This could happen if traders come across some positive news about the company or due to other contributing factors that led to a rise in stock price. 

Upper Circuit in Share Market 

While trading in the stock market, many among you might have come across that the market halted for 45 minutes as the Sensex hit 10% in the opening trade. 

But what causes this halt? Have you ever wondered? Well! This is all because of the upper circuit. 

As already discussed, that the stock market has a certain limit for every share to make sure that the price of the share remains within a particular limit thus preventing loss of traders. 

This upper circuit limit is defined by the Securities and Exchange Board of India (SEBI) just to ensure that the trade occurs without any manipulation. 

Upper Circuit NSE

NSE or National Stock Exchange has set the upper limit at three defined scales 10%, 15%, and 20%. This means any stock listed in NSE cannot move above or below the range of these limits. 

Setting this limit prevents the unusual volatility in the market thus preventing the loss or investors. 

Now, whenever the stock hits the upper circuit in NSE, then the stock market resumes nationwide and no trading occurs in that particular share for a few minutes. 

The market then resumes with the fresh share price depending upon its demand and other related factors. 

Upper Circuit BSE

Similar to the NSE, there is a certain defined upper circuit in the BSE as well. Not only to prevent the heavy losses of investors, this defined circuit also limits speculative trading. 

To make the concept simpler to understand, let’s assume the case of shorting.

Suppose you short sell the ABC stock, thus you are willing to buy it when the price drops. If there would be no circuit limit in the market and the price increases indefinitely, would you be able to limit your losses?

No, Of Course not!

Thus to limit such losses exchanges like BSE come up with circuit breakers. 

Not only the short-term traders, but long-term investors can also limit the losses with such upper circuit limits. 

How Upper Circuit Works?

In simple terms when the stock reaches the upper circuit, the trading stops. The time for which the market halts depends upon the upper limit (10%, 15%, or 20%). 

The maximum duration for which the trading session is paused is sometimes for the whole day. 

Now, what actually exchanges do when the upper circuit breaks?

As already discussed, that during the upper circuit, there are only buyers and no sellers in the market. To balance this number the exchange works similar to the opening session. 

Depending upon the share demand, it opens up with the new price that is in the range of opening price and upper circuit. 

Let’s understand this with an example, 

Suppose the stock of XYZ opens at ₹100 with the upper range defined at 15%. 

Now let’s suppose some kind of news related to the stock comes out that increases its demands, hence more buyers. This eventually increases its stock price and by 1PM it reaches ₹115 thus hitting the upper circuit. 

Now as per the rule of exchange, the trading of XYZ paused for 15 minutes. After 15 minutes, the market resumes again with the new price let’s say ₹110, and an upper circuit limit of 10%. 

Again, if the stock demand is high the circuit breaks again if the price hits, ₹121 before the market closes.

Upper Circuit Rules

To keep a check on the circuit breakers and to keep traders aware of the circuit breaker, there are few specific rules of upper circuit. 

Generally, the rules are similar for both the exchanges and are mentioned below:

  • The upper circuit breaks at 3 stages of index movement; 10%, 15% and 20%. 
  • As the stock or index (NSE or BSE) hits the upper circuit the trading stops in equity stocks and equity derivatives for a particular duration ranging from 10 minutes to the whole day. 
  • The market re-opens after circuit filter breach after a particular pre-open call auction session. 
  • The exchange must update any change in the upper circuit by regular or daily circular on the board. 
  • At the upper level, no intraday trading is allowed. 

Upper Circuit Limit

Since the upper circuit depends upon the last day’s closing price, and thus it changes every day. Any change in this upper range price is notified by the exchange at the time market opens. 

You can check the upper circuit limit in your trading app. Also, the upper circuit limit is being provided at the scrip page on NSE and BSE websites. 

So, you can simply check the circuit limit under live market data in NSE or BSE before initiating the trade. 

Upper Circuit Duration

Now that you know what an upper circuit limit is, the question is, for how long is the stock market put on a halt? 

The upper circuit duration depends on a lot of factors but majorly on the kind of stock. 

Depending on different stocks, the halt can be 15 minutes and sometimes even for the entire day. 

Although the break is not forever, the durations still differ a lot. There is a full detailed mechanism followed for the upper circuit limit. 

There is a 10% mechanism that helps to understand the concept of upper circuit duration. 

How Upper Circuit is Calculated?

Stock exchange updates the upper circuit limit every day. According to the SEBI guidelines 2013, the exchange calculates the circuit filters on the basis of Sensex and Nifty value attained in the last quarter. 

The limit decided is for per day trade for the next three months. 

For example, on the basis of the closing value of SENSEX in the quarter April-June 2013, the circuit limit is set 10% for the SENSEX point 1,950, 15% for 2900 points, and 20% for 3,875. 

This value can be lower or higher if circuit limits are to be set on the basis of the closing price of the per-day trade. 

Now here see the current value of SENSEX, if the index closed at ₹49,000, then the 10% upper circuit would be when the point increased by 4,900 i.e. when the SENSEX reaches at 53,900 within a single trading session. 

How to Buy Shares in Upper Circuit?

After understanding the upper circuit limit concept, it is also essential to know how to buy upper circuit stocks? 

Most of the time, a stock hits an upper circuit because of the exaggerated sentiment of the trader regarding that particular stock. The first thing that you should check or decide is whether you want to trade the stock in NSE or BSE.  

Now to trade at the upper circuit, it is good to trade at the earliest. You can place your order to buy the stock at the upper circuit by entering a correct buy price at the right time.

In general, buying or execution of the order in the upper circuit is usually on the basis of first come first serve. 

So, how can you gain a buying position in the stock that hits the upper circuit continuously? 

Well! The answer is simple by placing the order at the earliest. For this, you can either opt to place the After Market Order (AMO order) or during the pre-opening session that is around 9AM. 

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This offers you a better opportunity to execute the trade in the upper circuit stocks. 

If you place the AMO order, then the time here plays a very important role. 

To trade on the BSE, place the order between 3:50 PM-8:57 PM while for NSE the AMO order should be placed between 3:50 PM-8:59 PM.

After a time, the next important parameter is price. Here is the simple calculation. 

To buy a stock that is most likely to hit the upper circuit, place the order at the pre-opening session around 9 AM. You can also place the AMO to enter the trade in the upper circuit. 

Buy Price= Current Market Price x 1.05.

So, if the CMP of the share is ₹20 then place the buy order at ₹21. 

This will create a better chance for you to trade share at the upper circuit. 

Conclusion 

The market volatility and the supply and demand are the two parameters that led to hitting the upper circuit. 

Trading in the upper circuit proves to be beneficial for most of the traders as it opens a better opportunity for them to earn profit. 

Other than this, it becomes easier for market regulators (SEBI) to avoid price manipulation and to avoid any kind of scam in the share market. 

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