Panicked arises in investors when any stock hits the lower circuit, do you ever wonder what happened?.
Sometimes the stock market is very volatile, prices of any particular stocks increased drastically within a day or prices go drastically low as well within a day.
It will affect investors’ wealth, mentality as well as the stock markets reputation.
lots of stock market scams pump the stock prices very high, hence more and more retail investors start trading on that particular stock.
And, when this scam opens to the public, stock prices fall drastically within a day or hours,
to stop this destruction of wealth lower circuits were introduced.
To avoid this drastic rise and fall in stock prices SEBI (Securities and Exchange Board of India) has introduced Circuits.
Circuits put limits on prices of the stock, The main aim of the circuits is to control daily stock market fluctuations.
in the previous article, we explained ” What is Upper circuit“, with the same structure now we will understand “what is a lower circuit”
In the following article, we are discussing.
- What is a Lower circuit?
- how the Lower circuit works.
- Duration of Halt.
- Advantages of the Lower circuit, etc.
What is a Lower circuit?
The Lower Circuit is a Minimum limit on which a Stock Can Move on a Daily Basis.
When the stock hits the Lower circuit, the trading stops for a specific time on that particular stock.
In that time period, no Sellers able to sell that stock.
Supposed the stock has a lower limit of 10%, now let’s assume that single share prices closed at Rs 500 on the previous day,
so on the next day prices of that stock can move down to 10% of 500 that is 450, so when the stock hits 450 price mark,
then all trading on that stock is stoped for a specific time.
How the Lower circuit works
We know that the Lower circuit is an minimum price point beyond which stock price does not decrease in a day.
Also, an lower circuit is a scenario usually called “only sellers and No buyers”,
where investors only want to sell that stock and no investors want to buy that stock, Bearish trend will be started to build on that stock.
To counter this basically to control this unexpected fluctuation, Lower circuits were introduced.
In the Lower circuit scenario no one able to sell that share only buyers able to buy that share, basically No selling, only buying, started on that stock, i.e opposite of the upper circuit.
Circuit filters are a range applied to stock market indices, these circuit filters are applied at -20%, -15%, and -10% on the indices.
As circuit breakers are triggered, SEBI halts the trading in all the segments.
Duration of Halt.
- When a Price of the indices falls or rises 10% before 1 pm, trading is halted for 45 minutes, If there’s 10% movement between 1 pm and 2:30 pm, there is a trading halt of 15 mins and no halt in case it happens after 2:30 pm.
- If there’s a movement of 15% before 1 pm, trading is halted for one hour 45 minutes and for 45 minutes in case of a rise or fall between 1 pm and 2:00. When there’s 15% movement after 2:00 pm, trading is halted for the remainder of the day.
- Unlike the first and second stages, if a benchmark index witnessed a 20% movement at any time of the day, trading is halted for the remainder of the day.
investors can see the stocks with the lower circuit in trusted websites like Moneycontrol.
also, the exchange upon doubts of suspicious activity in-stock can apply filter percentage according to its wish.
Advantages of the Lower circuit.
- It controls the daily fluctuations of the stock market.
- With circuits, investors do not lose the majority of their wealth in a single day.
- Circuits help to reduce volatility in the stock market.
- With the integration of circuits, investing in the stock market becomes less risky.
- Circuits on some scale protect investors’ sentiments and emotions by reducing risk.
- Circuits reduce the effectiveness of stock market scams until, those scams open to the public.