In the context of stock markets, the terms “upper circuit” and “lower circuit” refer to certain price limits imposed on the trading of securities to manage extreme volatility. These circuit breakers are designed to prevent excessive price movements in either direction and provide a cooling-off period during times of market stress. The specific rules regarding upper and lower circuits may vary across different stock exchanges and markets.

1. Upper Circuit:

An upper circuit is a price limit set by stock exchanges to restrict the upward movement of a security’s price during a single trading session.

When a stock reaches its upper circuit limit, trading in that security is temporarily halted, and no further buy orders are accepted until the circuit breaker is reset.

Upper circuits are triggered when there is a rapid and significant increase in the price of a stock. This mechanism helps prevent situations where a stock price rises uncontrollably within a short period.

2. Lower Circuit:

A lower circuit is the counterpart to the upper circuit, representing the price limit set to restrict the downward movement of a security’s price.

When a stock reaches its lower circuit limit, trading in that security is halted, and no further sell orders are accepted until the circuit breaker is reset.

Lower circuits are activated when there is a substantial and rapid decline in the price of a stock. The mechanism is in place to prevent panic selling and give market participants time to reassess their positions.

Purpose of Upper and Lower Circuits:

1. Preventing Panic and Extreme Volatility:

Upper and lower circuits help prevent panic buying or selling that can lead to extreme price movements within a short time.

By temporarily halting trading, participants have an opportunity to digest information, assess market conditions, and make more informed decisions.

2. Market Stability:

Circuit breakers contribute to overall market stability by preventing abrupt and irrational price movements that could be detrimental to market integrity.

3. Fair and Orderly Trading:

These mechanisms ensure fair and orderly trading, allowing investors to transact at prices that reflect a more reasonable assessment of a security’s value.

4. Risk Management:

Upper and lower circuits serve as risk management tools, especially during times of heightened market volatility or unforeseen events.

It’s important to note that the specific rules for upper and lower circuits, including the percentage thresholds and duration of trading halts, can vary by stock exchange and market. Regulatory authorities and stock exchanges regularly review and adjust these mechanisms to ensure they align with market conditions and the goal of maintaining a fair and efficient trading environment.