What it means
Individual shares have price bands of 2%, 5%, 10% or 20%, set by the exchange. A stock at its upper circuit has only buyers and one at its lower circuit only sellers, so orders may not fill. Shares with futures and options have flexible bands that the exchange widens during the day. If the Nifty 50 or the Sensex moves 10%, 15% or 20%, trading across the whole market is halted for a time: the market-wide circuit breaker.
In practice
Circuit limits exist to slow panic and manipulation by forcing a pause. For traders they are a practical matter: before buying a small company's shares, check its price band, because a narrow band shows the exchange considers it risky.
A stock locked at its upper circuit day after day attracts attention, but the lack of sellers means you cannot buy in size, and the lack of buyers on the way down means you cannot get out.
What to watch for
An intraday position in a stock that hits its circuit can become impossible to close, which may lead to penalties or a forced auction. Stocks pushed up to their limits by tips on social media are a common trap for new traders.
Related terms
4 terms- NSE and BSEIndia's two main stock exchanges: the National Stock Exchange, home of the Nifty 50, and the Bombay Stock Exchange, home of the Sensex.
- VolatilityHow much and how fast price moves; high volatility means bigger swings in both directions.
- GapEmpty space on a chart where price opened away from the previous close and nothing traded in between.
- Market orderAn order to fill immediately at the best available price: it guarantees the fill, not the price.