Let's talk about circuits !

Not the electricity ones....Munna Bhai wala circuit bhi nahin.

Circuit filters in the stock markets !


1/n
#stocks

Circuits are basically price limits at which trading is suspended.

This is done to control excess volatility in prices and to protect the interest of investors.

In case of an abnormal price movement, circuits are hit and trading is suspended.

2/n
#circuit

Stocks usually have circuit limits of 20% from the previous day's close.

20% above is called the Upper Circuit Limit and 20% below is called the Lower Circuit Limit.

When a stock hits any of these circuit limits, trading is suspended for that particular stock for the day.

3/n

When any stock continuously hits the 20% circuits, the circuit limit is decreased to 10% and consecutively 5%.

One important thing, stocks which have derivatives or which are constituents of an index with derivatives, do not have circuit limits.

4/n
#derivatives

This is why you must have seen stocks like Yes Bank and DHFL move by 40-60% in a day.

This was for individual stocks. What about indices ?

When any of the two, either NIFTY or SENSEX hits a circuit, trading is halted for all the exchanges.

5/n
#index

This is called a "market wide circuit breaker". We saw MWCBs in March 2020.

This happens in 3 stages based on the extent of the move and the time when it happens.

Here is a picture of these stages. Feel free to ask me if you didn't understand this.

6/n
#MWCB

Circuits in the markets could be exciting or scary but you need to be aware of them as an investor.

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Hope this thread was worth your time

See ya !
n/n