Circuit filters in share market

Hi friends, have you ever been to a share market. If yes, then you must have heard about the circuit filters. But do you know what is circuit filter?

There are two types of circuit filters: lower circuit and upper circuit.

Lets discuss with an example:

Suppose the share price of company ABC is $10 on February 18, 2011. Lets there comes a negative news, lets say about a scam or a negative rumor about the ABC company. So it is obvious that when the market will open on February 21, 2011 (monday), there will be sellers for that company. As the news about ABC can be real or just a rumor so the market regulators like SEBI in India has adopted a strategy that share price should not decrease drastically by manipulation. So they made lower circuit filter of 5, 10, 15 and 20%. If the price of company ABC touche $9, it means it has touched the circuit filter of 10%. There can not be more sellers as it has touched its selling limit set by the market regulator.

Therefore lower circuit means, share price of a company can not fall below the lower limit set by the market regulator.

Let us now understand upper circuit:

Suppose the share price of company XYZ is $10 on February 18, 2011. Lets there comes a positive news, about the company. So it is obvious that when the market will open on February 21, 2011 (monday), there will be buying for that company. As the news about XYZ can be real or just a rumor so the market regulators like SEBI in India has adopted a strategy that share price should not increase drastically by manipulation. So they set upper limit of 5, 10, 15 and 20%. If the price of company XYZ touches $11, it means it has touched the upper circuit filter of 10%. There can not be more buying as it has touched its upper limit set by the market regulator.

Therefore upper circuit means, share price of a company can not rise above the upper limit set by the market regulator.

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