3.11What is a circuit limit?
1What is it?
A circuit limit (price band) is the maximum a stock is allowed to rise or fall in one day. Trading pauses or stops beyond it.
2Why does it exist?
It prevents panic crashes and crazy spikes, especially in small stocks, giving people time to think.
3Stock market example
Individual stocks have bands such as 2%, 5%, 10% or 20%, set by the exchange based on the stock’s risk. Many stocks that have futures and options trading have no fixed band; instead they have dynamic limits. The whole market also has index circuit breakers at 10%, 15% and 20% moves in the Nifty or Sensex.
4Calculation
Upper limit = Previous close × (1 + band); Lower = Previous close × (1 − band)
- Previous close ₹100, band 5%
- Upper circuit = ₹105
- Lower circuit = ₹95
The stock can trade only between ₹95 and ₹105 today.
5Quick revision
- Circuits cap daily price moves.
- Bands of 2/5/10/20% for many stocks.
- Index-wide breakers at 10/15/20%.
6Knowledge check
Q1. Previous close ₹400, 10% band. Upper and lower limits?Show answer
₹440 and ₹360.
Q2. Why do circuits exist?Show answer
To stop panic and extreme moves in a single day.
Q3. What happens if the Nifty falls 10%?Show answer
A market-wide circuit breaker halts trading for a period.