What are Upper Circuit and Lower Circuit in Share Market

Lower Circuit Meaning 

The lower circuit, also known as the lower price band, typically refers to the lowest level to which a company’s stock is permitted to fall during a particular trading session.

When the stock price hits its lower circuit, i.e., the lowest price band for the trading session, trading on that stock is temporarily suspended. It is carried out mainly to prevent a further fall in the price of that particular stock, safeguarding investors and traders from extreme losses.

Ways to Use Circuits on Company Stocks

Here are some of the ways in which circuits on company stocks can be used to your advantage:

• Using Stop-loss Orders 

Consider using a stop-loss order to sell the stock if it reaches the lower price band or circuit. This automated facility will automatically sell the stock if the market price of the stock reaches the lower price band, preventing further losses.

• Monitoring the Circuits 

Consider keeping an eye on the upper and lower circuits of the company stocks that you are willing to invest in or are invested in. It will help you get an idea of the volatility of the stock and help you make informed decisions.

• Avoid Herd Mentality 

Do not just follow others blindly. Just because a particular stock is hitting the upper circuit does not mean that it will continue to rise forever.

Similarly, just because a particular company stock hits its lower price band does not necessarily mean that it will continue to fall or is a bad investment.

• Conduct Proper Research 

Do not just invest based on other people’s suggestions. Always try to find out the reasons for the price movements – up or down – by conducting market research.

Consider checking several parameters, such as earnings, debt, PE ratio, P/B ratio, industry PE ratio, shareholding pattern, related news, etc.

• Benefit from Opportunities 

If the stock you are willing to purchase hits the lower circuit, it can be a good time to buy. Similarly, if you are willing to sell a particular stock when it hits the upper circuit, it might be the perfect time to sell and book profits.

Factors Driving the Upper/Lower Circuits

There are several factors that can result in the upper and lower circuits of a company's stock. These are as follows:

• Political unrest
• Changes in trade agreements
• Mergers, acquisitions, expansions, and insolvencies
• Change in rate of interest
• Financial performance of a company
• Confidence of investors

The Bottomline 

By now, you should have a better understanding of the upper circuit and lower circuit dynamics in the Indian stock market. However, navigating the stock market can be an unpredictable journey, with highs and lows that can leave you confused.

Therefore, it is crucial to approach investing with a well-researched strategy and professional support if needed.