Thread by @FincademyIn

How much can the market fall or rise in a single day?

A thread on Circuit Filters 🧵👇

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Circuits are the limits placed on market movements on daily basis to control volatility. It is a measure taken by stock exchanges to ensure the stability of the market.

There are 2 types of circuits: Lower circuit (on falling market) & Upper circuit (on rising market).

A circuit filter of 10% indicates that a particular stock/index cannot rise or fall more than 10% on a single day.

Stocks and indices have different circuit filters. Let's begin our discussion with Index circuit filters.

Indices like Nifty and Sensex have 3 stage circuits : 10% - 15% - 20% on either side.

For eg: If Nifty closed at 10000 on the previous day, then the circuit limits for next day will be 9000 on downside and 11000 on the upside.

The trading will be halted (stopped) if either of these levels are reached on the next day.

Let us further understand how the entire mechanism of circuits works for indices.

Here is an image taken from @NSEIndia website on the details of circuit filters:

Let us understand the mechanism, If the market opens and hits the circuit before 1:00 PM then trading is halted for 45 minutes. Post the 45 minutes period, a new pre-opening session will commence for 15 minutes and then the trading is resumed again.

Eg: Let us say the market opened at 9:15 AM and the lower circuit of 10% was hit at 9:30 AM then the trading will stop till 10:15 AM (45 minutes) and a new pre-opening session from 10:16 AM - 10:30 AM (15 minutes) will commence and normal trading will resume at 10:31 AM.

Now again let us say that market hits another lower circuit of 15% at 11:00 AM then trading will be stopped for 1 hour & 45 minutes as the next circuit is hit before 1:00 PM.

If the circuit of 15% is hit after 1:00 PM then the trading is halted only for 45 minutes and in both cases, it will be followed by a 15 minutes pre-opening session. Finally, If the 15% circuit is hit after 2:00 PM then the market is closed for the day.

At any given point of time, If a circuit of 20% is hit on indices, the market is closed and trading is halted for rest of the day.

Let us now understand the circuit filters for individual stocks: Stocks have defined circuit filters. These filters can be 2%, 5%, 10% or 20%. Stocks are categorized by the stock exchanges in these four circuit filter categories.

If a certain stock having a filter of 5% hits an upper circuit then at that point of time there will only be buyers in the stock and no seller and vice versa.

TIP: There is no circuit filter on stocks that are traded in derivatives segment also. This means that circuit filters are revised on every fall and they can fall or rise without limit.

Eg: In september 2018, shares of DHFL fell as much as 60% on a single day before closing at 42% down tick. DHFL was also in the derivatives segment.

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BY :
@RJGyanchandani