What is the upper and lower circuit?
The upper circuit refers to the maximum percentage rise that a stock or index is allowed to have in a single trading day, while the lower circuit is the maximum percentage fall that a stock or index is allowed to have in a single trading day. If the stock or index reaches the upper or lower circuit limit, trading in that particular stock or index is suspended for the remainder of the trading day.
The upper and lower circuit limits for a particular stock or index are determined by the respective stock exchanges in India based on factors such as market capitalization, trading volume, and volatility of the stock or index. These limits are periodically revised to ensure they are in line with market conditions and prevent excessive volatility in the market.
The use of upper and lower circuits in the stock market is a measure of investor protection to prevent drastic single-day reactive share price drops or hikes. The limit may be set at a figure represented by a percentage as determined by the stock market and may range anywhere between 2% and 20%. On most days, some stocks hit circuit filters on the NSE.
Circuits may be implemented not just for individual stocks, but also for an index. The circuit breaker system raises a red flag when an index either dips or rises by 10%, 15%, or 20%. When this happens, trading is halted not just in equity markets, but also in the derivatives markets in India. The duration of the halt depends on the percentage of the rise or fall in the index.
If an index rises or falls by 10%, a 45-minute halt occurs before 1 pm, a 15-minute halt occurs between 1 pm-2.30 pm, and there is no halt after 2.30 pm.
If there is a 15% rise or fall before 1 pm, there is a 1-hour 45-minute halt, a 45-minute halt occurs at or after 1:00 pm but before 2:00 pm, and a halt for the remainder of the day occurs at or after 2:00 pm
If there is a 20% rise or fall, trading is halted for the remainder of the day at any time during market hours.
In the history of NSE, there have been instances where Nifty has tested the upper and lower circuit filters.