What Is Circuit Limit? Why Stocks Hit Upper & Lower Circuit (Simple Guide)

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What is Circuit Limit Upper Lower Circuit

Circuit limits (aka circuit breakers) are simple safety limits exchanges place on stocks and indices to stop extreme volatility. Jab price ek pre-defined percentage tak upar ya neeche chali jaati hai in a single session, exchange trading ko temporarily restrict ya limit kar deta hai — taaki panic, manipulation, aur flash crashes ko roka ja sake.

Upper Circuit vs Lower Circuit — Seedha Sa Matlab

  • Upper circuit: Stock price reaches the maximum allowed rise for the day (trading may be restricted or only allowed at the upper price).
  • Lower circuit: Stock price falls to the maximum allowed drop for the day (trading stalls at lower levels and sellers can’t push price lower that day).
Upper and lower circuit explained

Kyu Lagte Hain Circuit Limits? (3 Simple Reasons)

  1. Control panic: Agar koi news ya rumor se price suddenly gir ya chadh jaaye, circuit time deta hai market ko cool down karne ka.
  2. Prevent manipulation: Large single orders se price ko artificially move karna mushkil ho jata hai.
  3. Orderly discovery: Market participants ko time milta hai — buyers & sellers re-evaluate, liquidity recover hoti hai.

Kaise Kaam Karta Hai (Practical)

Exchanges (jaise NSE/BSE) har stock ko ek circuit percentage dete hain — yeh stock ki volatility aur historical behaviour pe depend karta hai (1%, 5%, 10% etc.). Agar stock ka price us percentage boundary ko touch karta hai to:

  • Normal trade orders us limit price par baandh sakte hain (only limit orders at circuit price).
  • Kuch cases me auction window open hoti hai jahan exchange orders match kar ke price discover karta hai.
  • Trading resume ya restrict hona exchange rules par depend karta hai (time-based or session-based).

Common Scenarios — Real Examples (Short)

  • Positive result news: Company announces huge order → buyer interest = upper circuit.
  • Earnings miss / fraud news: Panic selling → lower circuit to stop fire sale.
  • Illiquid smallcap: Even small orders can hit circuit — risky for retail traders.

Trading Tips — Circuit Days (Practical & Safe)

  • Avoid market orders — use limit orders only.
  • Don’t chase breakouts that happen at upper circuit without volume & news verification.
  • For smallcaps, expect higher chance of circuit moves; size positions accordingly.
  • Check options chain & OI to see who is getting trapped (expiry days often see more circuits).

Quick TL;DR

Circuit limits are exchange safety valves — they pause or limit extreme daily moves to protect traders and maintain orderly markets. Upper = max allowed rise; Lower = max allowed fall. Smart traders respect circuits, check volume & news, and avoid impulsive orders on circuit days.

FAQ — Quick Answers

Q: Can I still trade when a stock is on upper circuit?

A: Usually only limit buy/sell orders at the circuit price are allowed; liquidity is very low.

Q: Do circuits happen on indices too?

A: Haan — exchanges have index-level circuit breakers to pause the market in extreme volatility (Nifty/BSE Sensex rules apply).

Q: Should retail traders buy at upper circuit?

A: Not recommended unless you have strong reason (verified news, high volume). Many get trapped on circuit days.