What is an upper circuit? How price limits work in Indian stocks
You may read that a stock "hit the upper circuit" after good results. This is how the limits work.
Upper and lower circuit
Every day, the exchange sets a price band for each stock. The upper circuit is the highest price the stock can reach that day. The lower circuit is the lowest. When the price touches the limit, trading in that direction stops for the day.
The usual bands are 2%, 5%, 10% and 20%. The exchange decides which band applies to which stock, and it can change a stock's band. Large shares that trade in futures and options have no fixed band.
What it means when a stock hits the upper circuit
Many buyers want the shares, but sellers are few. It does not mean the price will keep rising the next day.
What it means when a stock hits the lower circuit
Many people want to sell and few want to buy. You may not be able to sell your shares that day.
Market-wide circuit breakers
Separate from single shares, the exchanges can pause trading in the whole market if an index falls or rises very sharply. The index limits are 10%, 15% and 20%.
Why this matters to you
In a stock stuck at a circuit, you cannot always buy or sell at the price you want. Be careful with very small companies, where this happens often.
This article is for information and is not investment advice.