A circuit filter in the stock market is a regulatory mechanism used to control extreme price movements in stocks or indices. It sets predefined percentage limits on how much a stock or an index can rise or fall within a trading session. When the price reaches the circuit limit, trading is temporarily halted or restricted to prevent excessive volatility and speculation.
Types of Circuit Filters:
- Upper Circuit – The maximum price increase allowed for a stock or index in a day. Once hit, no further buying orders can be placed at a price above this level.
- Lower Circuit – The maximum price decrease allowed in a day. Once reached, no further selling orders can be placed at a price below this level.
Circuit Limit Levels:
- In India, stock exchanges such as the NSE and BSE set circuit filters at 2%, 5%, 10%, or 20%, depending on the stock's volatility and category.
- Indices (such as NIFTY and SENSEX) have broader circuit breakers at 10%, 15%, and 20%, which can trigger market-wide halts.
Benefits:
- Reduces the risk of panic buying or selling.
- Protects investors from excessive losses due to sudden price drops.
- Helps maintain market stability and fairness.
- Prevents market manipulation by limiting the potential for significant, rapid price movements.
