Upper Circuit is the upper limit for a stock, which cannot be crossed on the day for which it is set.
Upper Circuits are changed every day depending on the closing price on the previous day.
There are 4 price bands: 2%, 5%, 10% and 20%.
For stocks that are under the 10% price band, they can’t rise above 10% or fall below 10%.
For example, if a company called ‘Kajaria Ceramics’ closes at ₹ 300 per share. On the next day, if it is under the 10% price band, then the price cannot fall below ₹ 270 or rise above ₹ 330 per share. If it falls 10% to ₹ 270, it’s called lower circuit and if it rises 10% to ₹ 330, it’s called Upper Circuit.
Stocks hit ‘Upper Circuit’ when there are only buyers and no sellers. This can happen if there is some good news related to the company.
Check out the screenshot below and scroll down:
The screenshot above shows ‘Shakti Pumps’ hitting Upper Circuit on 1st February 2020 (Budget Day).
The Finance Minister announced a proposal to setup 35 lakh water pumps in the country. Since ‘Shakti Pumps’ is one of the top companies in the sector, as soon as the FM announced the news – people rushed to buy the share.
People were willing to pay any amount to buy the shares, this increased the demand. There were very few sellers, but a lot of buyers.
This ensured that the price touched the ‘Upper Circuit’ of 292.55 – 20% higher than the closing price on the previous day (31st January).
In the screenshot above, 195.05 is the 20% lower circuit and 292.55 is the 20% upper circuit.
BSE and NSE announce the daily limits for every stock before the start of the day.
Upper Circuit is not applicable for top companies that are listed in the derivative ‘Future and Option’ segment. Because there is no upper or lower circuit limit, these top stocks can fall or rise by 50-60% or more on a single day.
To avoid manipulation of stock prices in some of the smaller companies, NSE and BSE introduced the Daily Price Band through which stock price couldn’t cross the Upper circuit limit or fall below the Lower Limit.
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