Circuit filters, or price limits, are safety mechanisms in stock markets that prevent extreme price fluctuations. They set upper and lower limits for stocks or indices, halting trading when these limits are reached, allowing investors to assess the situation and make informed decisions.
A circuit filter works by setting upper and lower price limits for stocks and indices. If a stock’s price reaches the limit in a trading session, trading is either temporarily halted or restricted to control volatility.
Process of Circuit Filters:
- Setting the Circuit Limit:
- Exchanges like ;the NSE and BSE assign stocks different circuit limits (2%, 5%, 10%, 20%) based on factors such as liquidity and volatility.
- For indices (NIFTY, SENSEX), broader limits (10%, 15%, 20%) are applied, triggering market-wide halts.
- Price Movement Triggers the Circuit:
- If a stock’s price rises to the upper circuit, no buy orders above that level are accepted.
- If it falls to the lower circuit, no sell orders are accepted below that level.
- Trading Halt & Resumption:
- For stocks: Trading continues within the limit but orders beyond the circuit are not allowed.
- For indices: A trading halt is triggered for a specified duration if the limit is hit (e.g., 10% movement halts trading for 45 minutes).
- Normal Trading Resumes:
- After the halt, trading resumes with adjusted limits, allowing the market to absorb volatility.
- Impact on Intraday Trades:
- If an intraday trade is converted to a delivery due to a circuit breaker, investors must settle the trade on the next trading day.
Example:
- Suppose a stock is trading at ₹100 with a 5% circuit limit.
- If demand surges, it can rise to ₹105 (upper circuit), beyond which buying is blocked.
- If panic selling occurs, the price can drop to ₹95 (the lowercircuit), halting further selling.
