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Who Decides the Upper Circuit and Lower Circuit for a Stock?

In the fast-paced world of the stock market, investors are often confronted with terms like "upper circuit" and "lower circuit." These price limits are designed to control the volatility of stocks and safeguard investors from extreme market fluctuations. For traders, understanding the mechanisms behind these limits is essential to making informed decisions. In this blog, we will delve into the concept of upper and lower circuits and shed light on the entities responsible for determining these limits.

Understanding Upper Circuit and Lower Circuit:

Before we explore who sets the limits, let's grasp the meaning of the upper circuit and the lower circuit. In simple terms, these are predetermined price thresholds that restrict the movement of a stock on a particular trading day. When a stock hits the upper circuit, it cannot trade at a higher price for that day. Similarly, when it reaches the lower circuit, it cannot be traded below that price limit during the same session.

For instance, if Stock XYZ has an upper circuit set at Rs. 1500 and a lower circuit at Rs. 1000, the stock's price will not be allowed to exceed Rs. 1500 or fall below Rs. 1000 during the day's trading.

What is lower circuit in share market?

A lower circuit in share market is generally triggered when a particular stock witnesses a huge negative reaction. It often happens due to unfavourbale news, that results due to a panic set off by the investors. For example, if the lower stock of a stock is set at 20%, no additional selling is allowed. 

the minimum stock value that a share market can hit on a particular day is generally known as lower circuit in share market.

Who Sets the Limits?

The responsibility for setting the upper and lower circuits lies with the stock exchanges in the country. In India, for instance, the major stock exchanges, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), play a crucial role in determining these price limits.

1. Securities and Exchange Board of India (SEBI):

The primary regulatory authority governing India's financial markets is SEBI. While SEBI does not directly determine the price limits for individual stocks, it sets the framework and guidelines within which the stock exchanges decide the circuit filters. SEBI's objective is to promote market integrity and investor protection, and the circuit limits are a part of these measures.

2. Stock Exchanges:

The stock exchanges like NSE and BSE ensure orderly and smooth trading operations. To achieve this, they implement circuit breakers that temporarily halt trading if price movements breach certain thresholds. This mechanism helps prevent market manipulation and panic selling or buying.

Factors Influencing Circuit Limits:

The determination of circuit limits is not arbitrary; it takes into account several factors that affect a stock's volatility and market capitalization:

Stock Price Movements: Historical price data of the stock is analyzed to ascertain the range of price fluctuations, and circuit limits are then set accordingly.

Market Capitalization: Highly capitalized stocks tend to have wider circuit limits due to their stability, while lower-cap stocks may have narrower limits.

Sector and Industry: The nature of the industry in which a company operates also influences circuit limits, as some sectors are inherently more volatile than others.

Market-Wide Conditions: In times of heightened market volatility or uncertain economic conditions, stock exchanges may adjust circuit limits across the board to manage overall market risk.

Conclusion:

The upper and lower circuits play a crucial role in maintaining market stability and safeguarding investors from wild price swings. The responsibility for setting these limits rests with the respective stock exchanges, guided by the overarching regulatory framework provided by SEBI. These price constraints are not fixed but are subject to change based on various factors impacting a stock's performance and the overall market sentiment.

The minimum stock value that a share market can hit on a particular day is generally known as lower circuit in share market.

As an investor, understanding the significance of circuit limits can help you make more informed decisions, as you gauge the level of risk associated with a particular stock. It is essential to keep a close eye on market conditions, monitor regulatory updates, and consider circuit limits as one of the many factors influencing your investment strategy. Mastertrust, as a leading financial service provider, can assist you in navigating the complexities of the stock market and guide you towards making well-informed investment choices. Happy investing!