Circuit limit/ daily price bands are nothing but the high and low limits within which the stock orders can be placed for the day. If you try to place order above or below the limit, the order won't be accepted.
In NSE, there are generally 4 types of bands.
2%
5%
10%
20%
Circuit limits of any stock will in one of the above. This limit is decided by the stock exchanges- NSE and BSE
(BSE has different categorisation. However, for individual stocks, the circuit limits in both BSE and NSE will more or less be equal or with negligible differences)
Based on the previous day's close price, the current trading day's circuit limit is calculated.
For eg,
previous day's close is Rs.55.7
5% above this price is 58.45 which is the upper limit for the current day
5% below 55.7 is 52.9 which is the lower limit.
Hence, the circuit limit for the current stock is 5%
This circuit limit % is constant for the stock and will be reviewed by the exchanges periodically.
Need for Circuit limits:
Circuit limits curb the excessive volatility of a stock. News about the companies are watched by huge number of people and any news will affect the prices of the stock in either way. Some very bad/good news will create panic in the market and the urge to sell/buy will make the stock price go for a toss in either situation.
Generally,stock prices normally consolidate over a price that the market perceives as a valid multiple of its Earnings per share(EPS). This multiple is what you will see as P/E ratio. Normally the P/E ratio is based on the industry and the expectations from the company.
So when some panic is there in the market, the volatility will affect the price soon before these ratios are calculated and a consensus is created in the market.
This price bands ensure that any erratic order(out of the bands) placed by any trader/investor doesn't get executed and create a sudden drop/jump in the price.
This circuit band is decided by the liquidity(number of shares traded per day) and the current trend in the stock.
If there are excess volatility in a stock, the price band will be reduced to 5% or even 2%. If the stock is a large cap one or blue chip ones, the value will be 10% or 20% as the liquidity of these ones are really high and panic wont affect the stock even with very big news.
Why a circuit hits its limits?
Bad news will create panic pushing many people to sell the stocks. When the panic extends for more time, the stocks price will go down soon and will hit the lower band. Some very good news will create enthusiasm in the market, pushing the price upwards. Prolonged enthusiasm will make the price reach the upper band.
On 22 Jan,2016, due to a bad news Interglobe Aviation(Indigo)'s share price tumbled by 20% and it couldn't go lesser than that. This allowed the market to settle, thus preventing the erosion of the rest investor's wealth.
On 11 Feb,2016, NSE reduced the circuit limit for Indigo to 10%.
As the panic got settled and consolidation started happening, from 11 Mar,2016, Indigo's limit was again raised to 20%
(This band limit change happened for 140 stocks in NSE and 346 in BSE in the same day)
In order to enhance the market integrity and to prevent excessive price movement in the securities listed on its trading platform, BSE as a pre-emptive surveillance measure has an additional framework of periodic price bands in addition to the aforesaid daily price band framework. These additional periodic price bands shall be applicable to securities exclusively listed and traded on BSE Equity Trading Platform including securities listed on SME and SME ITP platform. The periodicity of these price band shall be weekly, monthly, quarterly and yearly and the same is as follows;
Securities with daily price band as
|
Weekly Price Band
|
Monthly Price Band
|
Quarterly Price Band
|
Yearly Price Band
|
20%
|
+/- 60 %
|
+/-100 %
|
+/-200 %
|
+/-400 %
|
10%
|
+/- 30 %
|
+/-60 %
|
+/-100 %
|
+/-200 %
|
5%
|
+/-20 %
|
+/-30 %
|
+/-60 %
|
+/-100 %
|
2%
|
+/-10 %
|
+/-20 %
|
+/-30 %
|
+/-50 %
|
In addition to the above, for monthly, quarterly and yearly limits a factor of 200 % of S & P BSE Midcap Index movement shall be applied for taking into account the overall movement in the market to the Monthly, Quarterly and Yearly price band limits. This factor shall be added in the direction of the movement of the index (rounded off to the nearest number) and the threshold of the opposite direction will remain unchanged.
Illustration: a security having applicable price band of 20 % can move upward or downward upto 20 % in single day. In a week it can move upward or downward upto 60 % whereas in a month it can move upward or downward upto 100 % and so on. Further, if the S & P BSE Midcap has moved up by 5 % in the month, then the upper limit of monthly price band shall be adjusted by 10% i.e. the upper monthly price band shall be 110 % whereas the lower price band shall remain as 100%.
In the event of any corporate action, the respective price of the security shall be adjusted as per the prescribed process.
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