EXPLAINED: How upper and lower circuits help regulate your investments

Can stock be traded so high in a day that it can double or triple its value? The answer is - no. The Securities and Exchanges Board of India (SEBI) puts a certain limit on a stock’s trading potential in India – and this is termed the upper and lower circuits. 

What is the upper circuit? 

The highest level that a stock can touch in a day beyond which its value can’t rise in a day is called the upper circuit. Usually, stocks that are high in demand but not too many willing to sell reach the upper circuit. The upper circuits are determined by the closing price of the stock, the previous day. The upper circuit may usually be marginally higher than the closing price of the stock the previous day. A stock’s price will only drop if starts getting sold in the market.  

How is the upper circuit useful? 

If a stock is in demand on a particular day and there are not too many sellers, chances are, the stock prices would shoot up very high on a particular day. The upper circuit pricing in that case puts a cap on how high the price can hit on the day and protect investors from volatility.

What is the lower circuit? 

Just as an upper circuit puts a cap on the upper limit of stock’s price for the day, lower circuit price puts a cap of the lowest price limit of stock for a day – which indicates the least price at which a stock can trade on a particular day. The lower circuit for a day is usually set slightly lower than the lower circuit price of a previous day 

 

How is the lower circuit price useful? 

The lower circuit price prevents a stock’s price from sinking beyond a point as a limit is set. However, if people start buying, the price of the stock may rise. 

 

How much can the upper and lower circuit of a stock shift in a day? 

The upper and lower circuit prevents speculation and volatility. Depending on which category it belongs to, a stock can shift 5 per cent, 10 per cent and a maximum 20 per cent during a trading day.  

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