Fictionary- Lower Circuit
Lower
circuit essentially refers to the minimum price at which a stock is allowed to
fall downwards. Usually, most stocks start with a 20% circuit. Recently major
stock exchanges as well as IRCTC hit the lower circuit due to the prevailing
market conditions arising in the country and the world at large.
BY RADHIKA SETHI | 2 MIN READ
This happened as an effect of the uncertainties
raised in the market over concerns of health and the effects faced by all
sectors. At this point in time, the stock market has been affected severely
which is clearly evident with the report of stock exchanges hitting the lower
circuit.
Stocks
listed at a stock exchange have a price range, under which it is divided into
lower or upper circuits. Lower circuit is when the stock is allowed to fall
below a minimum price.
Suppose the stock price is 100, then the lower
circuit would be 80. The values are determined by the stock exchange to protect
investors from over fluctuation and volatility. Now, with mostly sellers, the price will continue to
go down. Hence at the lower circuit, in order to stabilize the price, only
buying orders are allowed. Once the price correction is done, the normal trading
resumes. But it also means that investors in a failing market will find it
difficult to exit, at least in the very short time period.
Once a stock hits the lower circuit, not much can be
done. When a stock hits the lower circuit it halts further trading, either for
a few hours or the day. Circuit breakers are a form of market curbs and are
done to curb panic selling during such times. This helps to maintain stability
in the market and for the investors.
In order to avoid the free movement of stocks,
upwards or downwards, exchanges limit the minimum and maximum price movement of
the stock. Hence the minimum limit is the lower circuit of stock. They are
determined by stock exchanges to save the investors from unwanted shocks. In
case of a sudden swing, investors may lose a large part of their invested
capital. Even traders may have to face margin calls from their brokers, in case
market plummets or rallies too much.
Recently, IRCTC reportedly hit 5 percent in the
lower circuit. Shares of IRCTC were locked at Rs 1,000.35 as Indian railways
cancelled 155 trains due to low occupancy and the coronavirus pandemic. There
were nearly 3.1 lakh pending sell orders with no buyers on NSE and BSE.
India’s equity benchmark also tumbled 10% recently
in the early session moving on to hit the lower circuit, resulting in a trading
halt for the first time since May 2009, as panic gripped the market due to
apprehensions related to the outbreak of the Coronavirus pandemic. Due to this,
trading was put on hold for a period of 45 minutes. The Sensex had slumped
approximately 9.4 percent as well.
Before this happened, the Indian equities had also
entered into the bearish phase, tracking their global peers who were witnessing
the worst selloff ever since the 2008 financial crisis.