How Upper Circuit Works? 

Have you ever heard that trading is halted for a specific time? If yes, then you might have wondered why it happened. Well! It all because when the price of the stock reaches upper circuit value. In this article, we will discuss a clear concept of how upper circuit works. 

To avoid any kind of suspicious act and to limit the rise and fall in the share price of stocks, the Securities and Exchange Board in India (SEBI) puts certain limits on the prices of the stock.

The reason being the indefinite increase or decrease in prices of a stock in a single trading day. 

There are certain limits or benchmarks. This is the range within which the prices can fluctuate or will fluctuate in a particular trading day. 

So, the question here is how upper circuit works? To find the answer to this question, it is essential to understand the meaning of the upper circuit. 

Also Read: Upper Circuit Rules and Rules of Share Market

The market has ranges in which it can fluctuate. The maximum limit till which the stock can move on a given trading day is called the upper circuit. After the stock reaches the upper circuit, the trading stops for a specific time. 

When a stock hits the upper circuit, there are only buyers who can reap the benefit of trading at maximum price. The upper circuit stays for a short time, so the trading has to be quick. It is challenging to find sellers after a stock hits the upper circuit. 

Now here the question arises of how to trade when the upper circuit breaks or say how upper circuit works. 

How Upper Circuit Works In Stock Market?

As already known in the stock market, the two words are commonly known, price bands and circuit filters. 

On one hand, where the price band is used for individual stocks, the circuit filter pertains for the overall indices. Thus, where individual stocks have price bands, indices have circuit filters. 

Now the upper circuit is the point that depicts the maximum price point and beyond which the price does not increase.

These circuit filters are applied at 10%, 15%, and 20% and as the circuit breakers are triggered, it halts the trading in all the segments including equity and Futures &Options. 

If you want to trade in the upper circuit, then you must book your slot prior. The upper circuit prevents the prices from increasing a lot and prevents panic amongst the traders. That is what knowing how to calculate upper circuit is super important.

The majority of stocks begin with a 20 percent circuit. That means if the price of a stock is Rs. 200, then the upper circuit will be Rs.240.

The upper circuit indicates that the price of this particular stock will not go above Rs. 240 on that trading day. 

Now as the upper circuit is reached, the market halts, the summary of which is given below. 

 

A circuit limit is triggered when either Nifty 50 or BSE SENSEX breaches the limit. The upper circuit becomes essential to curb the losses. 

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Conclusion

The upper circuit works to check the unnecessary increase in stock price on a particular trading day. Imagine if there was no limit, then the price of a stock would have shot up and made trading very difficult for the traders. 

The upper limit is usually decided according to the closing price of the stock on the previous day. Usually, the circuit starts at 20 percent and then changes depending on the trading day’s demand. 

The upper circuit has become an essential part of the stock market, and understanding it in depth has become an absolute necessity.

If you are someone willing to trade in the upper circuit, you should be patient, quick, and affluent with the concepts. 

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