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Upper circuit stocks are stocks that have reached their maximum permissible price increase for a trading session set by stock market regulations. When buying activity rapidly increases in the stock market, an upper circuit mechanism temporarily suspends the stock and restricts its price from rising further during that trading session. Upper circuits prevent excessive volatility and maintain market stability. In India, the Securities and Exchange Board of India (SEBI) regulates the limits on the maximum daily price movement of stocks.
Understanding the Concept of Upper Circuit
Here's how the upper circuits work:
Maximum Price Increase & Upper Circuit Limit
Each stock listed on a stock exchange typically has predefined limits for price movements in a single trading session. These limits are set as a percentage of the stock's previous closing price. For example, Tata Motors stock has a 5% upper circuit limit which is Rs.436.35.
When a stock's price hits its upper limit, the stock exchange temporarily halts or "freezes" trading for a certain period during the trading session. This halt prevents further rapid price increases which could result from excessive speculation or manipulation.
Market Orders & Cooling-Off Period
Investors cannot place market orders to buy the stock when it's in an upper circuit. They can only place limit orders at or below the upper circuit price. If there are existing limit orders to sell the stock at or below the upper circuit price then those orders get executed when the stock's trading resumes.
The halt due to an upper circuit is typically followed by a cooling-off period. Trading in the stock remains suspended during this period. This period allows traders and investors to digest information and prevents a rush to buy or sell the stock when trading resumes.
Lower Circuit
Conversely, stocks also have lower circuit limits which restrict how much a stock's price can decrease in a single trading session. When a stock hits its lower circuit, trading is temporarily halted to prevent excessive downward price pressure.
Upper circuit and lower circuit limits vary from one stock to another and are determined by stock exchanges and regulatory authorities. These circuit breakers are an important part of risk management in stock markets
Regulatory Measures
Upper circuits are regulatory measures designed to maintain orderliness and fairness in the market. They are meant to prevent extreme price fluctuations and maintain market stability.
Investors need to be aware of these circuit-breaker mechanisms when trading in stocks. They significantly impact the ability to buy or sell shares during periods of extreme price volatility.
The Role of SEBI in Regulating Upper Circuit Stocks
The regulatory framework in India that governs upper circuit limits is established by the Securities and Exchange Board of India (SEBI). It is the regulatory authority for the securities market in the country. SEBI sets the guidelines and rules related to circuit limits to maintain market integrity, prevent manipulation, and maintain fair trading practices.
For most stocks, the upper circuit limit is set at 20% of the previous closing price. However, the limit is set at 5% or 10% for some stocks with relatively lower market capitalization or liquidity.
Key points regarding the regulatory framework for upper circuit limits in India:
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SEBI Guidelines
SEBI issues guidelines specifying the criteria for stocks to be categorized as upper circuit stocks. These guidelines include the percentage limit by which a stock's price can increase in a single trading session.
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Regular Revisions
The upper circuit limits are periodically revised by stock exchanges based on factors such as volatility, market conditions, and the stock's historical price movements.
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Market Surveillance
SEBI and stock exchanges actively monitor market activities to detect any irregularities or attempts at market manipulation especially in the context of stocks hitting upper circuits.
How Does the Upper Circuit Stock Limit Work?
The upper circuit limit for a stock is typically set as a percentage of the stock's previous closing price. It varies from one stock to another. The upper circuit limit is determined by stock exchanges and regulatory authorities and is subject to change based on market conditions.
Here's how the upper circuit stock limit works and what happens when a stock reaches this limit:
Calculation of Upper Circuit Limit:
The upper circuit limit is calculated as a percentage of the stock's previous day's closing price. For example, Tata Power’s upper circuit limit is set at 5% and the stock's previous closing price was ₹264.60. Therefore, the upper circuit limit for the day would be ₹277.83.
Daily Adjustment:
The exchange adjusts the upper circuit limit daily based on the closing price of the previous day. This means that the percentage limit may change from day to day as the stock's price fluctuates.
When the Stock Reaches the Upper Circuit:
When a stock's price reaches the upper circuit limit during a trading session, the following usually happens:
- The stock exchange temporarily halts or freezes trading of the stock. This means that investors cannot place market orders to buy the stock. They can only place limit orders at or below the upper circuit price.
- Once trading resumes, the system will execute limit orders to sell the stock at or below the upper circuit price.
Next Trading Day:
The system recalculates the upper circuit limit based on the previous day's closing price when the next trading day begins. If demand for the stock continues, it reaches its upper circuit again during the new trading day and the process repeats.
Let's go through the upper circuit stocks list in India.
Real-World Examples
Here are a few recent examples of stocks that have hit upper circuits in India:
One Point One Solutions
On November 20, 2023, shares of One Point One Solutions hit the upper circuit limit of 20% after the company announced the incorporation of a wholly-owned subsidiary in Singapore. The subsidiary will help expand the company's global footprint.
Shilchar Technologies
On November 23, 2023, shares of Shilchar Technologies increased 20% to hit the upper circuit after the company secured an export order worth Rs. 30 crore from a Germany-based multinational corporation. The large order win boosted investor sentiment in the stock.
Vishwaraj Sugar Industries
On November 15, 2022, shares of Vishwaraj Sugar Industries saw a sharp rise of 20% to hit the upper circuit after the company reported strong Q2 FY23 results. Revenue grew by over 50% and profit increased 5 times compared to the same period last year. The company's impressive financial performance has driven the stock price to increase.
Final Words
Upper circuit stocks in India are those that have reached the maximum allowable price increase for a trading session. SEBI plays a pivotal role in setting guidelines for upper circuit stocks as well as monopoly stocks and monitoring market activities in maintaining fair trading practices. Understanding these circuit breakers is crucial for investors in stock markets.