In this blog post, I talked about how to exit from lower circuit stock, so if you were searching for it, I assure you that your search ended here.
The stock market is famous for being unpredictable. No need to be surprised when an investment suddenly doubles or triples overnight.
But what if the stock market plummeted by 50% or more, it would undoubtedly cause chaos in the financial world.
Regulators like the Securities and Exchange Board of India (SEBI) have observed traders and institutional investors engaging in suspicious activities, resulting in devastating losses for retail investors.
And This is why the concepts of an upper circuit and a lower circuit were introduced.
What is Circuit in Share Market?
In the share market, a circuit is a mechanism used to restrict the price of a security to either a set minimum or maximum. It is designed to prevent sudden, sharp increases or decreases in the stock price, protecting buyers and sellers from too much volatility.
In July 2001, the National Stock Exchange of India (NSE) implemented a circuit breaker system.
The index-based market-wide circuit breaker system is triggered when the BSE Sensex or the Nifty 50 moves by 10%, 15%, or 20% in either direction. Upon activation, trading of all equity and equity derivative markets across the nation is halted in a coordinated manner.
The image below displays the time of the pre-open session and market halt following the market halt:
The above screenshot is taken from NSE official site.
What is Upper Circuit?
Upper Circuit is a term used in the stock market to refer to the highest price a stock has traded during a given trading period. It is typically calculated by taking the highest price a stock has traded during the day and multiplying it by a predetermined percentage.
This percentage is typically between 5-10%. Upper Circuit is seen as a ceiling for the stock price, as it is unlikely for the stock price to go beyond this level.
In short upper circuit stocks meaning stocks that have reached their upper limit. When the stock reaches its upper limit, there are only buyers present and no active sellers.
What is Lower Circuit?
The lower circuit in the stock market is a price limit set by the stock exchange. This limit prevents stock from falling below a certain level and is used to protect investors from large losses.
The circuit breaker is triggered when a stock reaches the designated lower limit, and trading is suspended for the day. This helps to prevent panic-selling and large losses in highly volatile markets.
When a stock reaches its lower circuit, there are no buyers present, only sellers attempting to sell, but since no one is willing to purchase, the orders are not fulfilled.
Example of Lower Circuit Stock
Let us gain a clearer understanding of lower circuit stocks by using an example.
Lower circuit stock is a term used to describe a stock whose price has dropped to the lower circuit limit set by the stock exchange. For example, if the lower circuit limit for a particular stock is ₹100, then the stock is considered lower circuit stock if the price drops to ₹100 or lower.
Reasons Stock Hit Lower Circuit?
Possible causes for stocks hitting a lower circuit can vary. Here are a few of them.
1. Poor Financial Performance: Poor financial performance is one of the most common reasons stocks hit the lower circuit. This could be due to a company’s inability to generate profits or a decrease in its revenue.
2. Market Volatility: Market volatility can cause stocks to hit the lower circuit. This is especially true during economic uncertainty or a large sell-off in the market.
3. Poor Market Sentiment: Poor market sentiment can lead to a decrease in stock prices. This can be due to a negative news story or a sudden change in investor sentiment.
4. Regulatory Changes: Regulatory changes can also impact stock prices. For example, if a new regulation is introduced that affects a company’s ability to operate, it could decrease stock prices.
5. Insider Selling: Insider selling can also cause stocks to hit the lower circuit. This is when a company’s executives or board members sell their shares in the company, leading to a decrease in stock prices.
I hope the above explanation clears up what is upper circuit and lower circuit in share market. Now let’s see how to exit from lower circuit stock.
How to Exit From Lower Circuit Stock?
It is essential to have basic knowledge of stock market investing and trading before starting. Or you might lose a significant amount of money.
If you are stuck in a “lower circuit” stock, the question often arises of how to exit from lower circuit stock. You have two options to leave the circuit breaker in the stock market.
A helpful approach for exiting a lower circuit stock is to add a limit order at the last traded price (LTP). If an individual attempt to buy the stock, the first order near the last traded price (LTP) will be executed on the market.
Or to exit from a lower circuit stock, one should place orders during the pre-opening session or AMO (After Market Order). These orders will start to be executed once the trading session ends or before it begins. Because if you want to be the first to sell stock during a circuit breaker, placing your order as soon as possible is best.
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This blog post outlines all the essential information concerning how to exit from lower circuit stock. Investing in lower circuit stocks is not advisable, but unfortunately, beginners and experienced traders often make this mistake. To limit losses, it is best to sell your positions from these stocks as soon as possible.
Happy Learning 😊 & Happy Trading 😊.