In the dynamic world of stock trading, various terms often leave investors perplexed. One such term is the "lower circuit." Understanding what it means and how it impacts the share market is essential for investors. Let's delve into the concept of the lower circuit and shed light on its significance.

In this blog, we will look at the lower circuit shares present in the market and their impact on the overall market shares.

Explaining the Lower Circuit:

In the share market, a lower circuit refers to a situation where trading in a particular stock is halted for the day due to a significant downward movement in its price. Trading is suspended to prevent further panic selling when the stock price falls beyond a predetermined percentage, usually 10% or 20%.

Reasons for Lower Circuit:

Lower circuit triggers are typically in place to safeguard market stability and protect investors from extreme volatility. It serves as a circuit breaker, preventing sharp and continuous declines in stock prices. Factors triggering a lower circuit include negative news, economic downturns, poor financial performance, or adverse events impacting the company.

The only demerit of a lower circuit stock is that if a stock hits the lower circuit, there will be only sellers and no buyers for the stock

Calculation of Lower Circuit Shares:

The lower circuit shares are calculated based on the previous day's closing price of shares. The closing price of each share might differ from one stock to another. For some circuits, the closing price might be 2% less than the previous share price. 

Meanwhile, for some other stocks, the closing price could be less than 15% to 20% less than the previous share prices. However, the price of stocks may rise again if people start buying the stocks again.

Implications for Investors:

For investors holding stocks that hit a lower circuit, it means they can only sell their shares once trading resumes the next day. This restriction prevents hasty decision-making and encourages investors to evaluate the situation calmly. It is important to note that while a lower circuit can limit losses, it can also hinder investors' ability to exit positions swiftly.

Psychological Impact:

Lower circuits often evoke fear and uncertainty among investors. The sudden halt in trading and the inability to react can exacerbate panic, leading to increased selling pressure once trading resumes. Investors must remain level-headed, conduct thorough research, and consider long-term strategies rather than succumbing to impulsive actions.

Regulatory Measures

Stock exchanges and regulatory bodies implement lower circuits to ensure market integrity. They aim to maintain a fair and orderly trading environment, preventing excessive price fluctuations that may compromise investor confidence. These measures contribute to the overall stability of the market.

Conclusion

Lower circuits are an integral part of the share market ecosystem. They serve as protective measures during times of extreme volatility and provide breathing space for investors to reassess their strategies. 

Understanding the concept of lower circuits empowers investors to make informed decisions, manage risk, and navigate the complexities of the stock market with greater confidence. By staying informed and adopting a long-term perspective, investors can mitigate the impact of lower circuits and harness the potential of the share market.