A lower circuit is a term used in the stock market to describe a situation where the price of a particular stock or index falls below a certain predetermined level, triggering a halt in trading for that security. In other words, it is a circuit breaker that is put in place to prevent excessive volatility in the market.
When a stock or index hits its lower circuit limit, trading is suspended, and investors are unable to buy or sell shares until the market reopens. This limit is set by the stock exchange and is generally based on a percentage decline from the stock's previous closing price. The purpose of the lower circuit is to prevent panic selling and to give investors time to reassess their positions before resuming trading.
Lower Circuit Selling Example
Let's say you hold 1,000 shares of ABC Company, which is currently trading at Rs. 100 per share. The stock exchange has set a lower circuit limit of 10% for ABC Company, which means that if the stock price falls by more than 10%, trading will be halted. Now, let's say that ABC Company announces some negative news, which causes investors to sell their shares, and the stock price falls by 10% in a short period of time. This triggers the lower circuit, and trading in ABC Company is halted. Since you hold 1,000 shares of ABC Company, you may decide to sell your shares once trading resumes to limit your losses. When trading resumes, you place a sell order at the current market price, which is now Rs. 90 per share (10% lower than the previous closing price). However, since many other investors may also want to sell their shares, there may be a shortage of buyers in the market, and your sell order may not get executed immediately. In this case, you may have to wait until the next trading session to sell your shares. If the stock price continues to fall, it may hit the lower circuit again, and trading will be halted once more. This cycle may repeat until the market stabilizes, or until you're able to sell your shares at a price you're comfortable with.
Selling Shares in Lower Circuit
Selling shares in a lower circuit can be challenging because the lower circuit is a scenario where the price of a stock has hit a lower limit and cannot be traded below that level. Here are some steps you can take:
Determine the reason for the lower circuit: Find out the reason behind the lower circuit. It could be due to company-specific issues or market-wide concerns.
Analyze the market: Analyze the market conditions and other factors that are causing the stock to hit the lower circuit. This will help you understand the potential risks and rewards of selling the stock.
Place a sell order: Place a sell order at the lower circuit price or slightly above it. Keep in mind that the order may not get executed immediately, and you may have to wait until the next trading day to sell the shares.
Monitor the market: Monitor the market closely and keep an eye on the stock's price movements. If the stock price starts to rise, you can consider canceling your sell order and hold onto your shares.
Seek professional advice: If you're unsure about what to do, seek professional advice from a stockbroker or financial advisor who can guide you on the best course of action.
Understand the circuit limits: Every stock has circuit limits that prevent it from trading below a certain price. It's important to understand the circuit limits of the stock you're holding so that you can place your sell order accordingly.
Keep an eye on the volume: Lower circuits are often accompanied by low trading volumes, which means that there may not be enough buyers in the market to execute your sell order. Therefore, it's important to keep an eye on the trading volume of the stock before placing your sell order.
Set realistic expectations: In a lower circuit scenario, it may be difficult to sell your shares at a desired price. Therefore, it's important to set realistic expectations and be prepared to sell your shares at a lower price if necessary.
Be patient: Selling shares in a lower circuit can take time. It's important to be patient and not panic, as market conditions can change rapidly.
Diversify your portfolio: To minimize the impact of a lower circuit on your portfolio, it's important to diversify your holdings across multiple stocks and sectors. This will help spread the risk and reduce the impact of any individual stock's performance.
Conclusion:
Selling shares in a lower circuit can be risky, and it's important to carefully consider all the factors before making a decision.