What is a Circuit Limit?
In order for a stock not to be allowed to freely move upwards or fall downwards, exchanges usually limit the maximum (and minimum) price moment of the stock.
These limits are called circuit limits.
An upper circuit is the maximum price to which a stock is allowed to move upwards.
Similarly, a lower circuit is the minimum price to which a stock is allowed to fall downwards.
Most stocks start with a 20% circuit.
For example, if a company stock CMP is Rs. 100,
It can move upward by a maximum of 20% in a single trading day.
ie 20% of 100 = 100 + 20 = Rs 120
So, Rs. 120 is the upper circuit for it.
Similarly, it is restricted to not fall below 20% in a single trading day. ie 20% of 100 = 100 - 20 = Rs 80
So, the stock price is allowed to move between Rs. 80 to Rs. 120 on that given day.
The circuit filters are applied on the previous day closure of the stock.
The circuit levels are determined by the stock exchanges so as to protect investors from an unwanted too much of a surprise moment.
When a stock hits an upper circuit, there will be only buyers and no sellers.
So, if someone wants to sell the stock, they can do so.
Similarly, when a stock hits a lower circuit, there will be only sellers and no buyers.
So, if someone wants to buy the stock, they can do so at the lower circuit.
When a stock continously hits upper circuit for few days, the exchange restricts its price movement by revising the circuit from 20% to 10%.
After few days of continous 10% Upper Circuts, it is revised from 10% to 5% and then to 2%
The stock exchange announces the circuit filters on the stock website (such as on BSEIndia.com) every day.
Change in circuit filter percentages are announced by way of a daily circular / notice.
Apart from these, the exchange, upon doubts of suspecious activity in a stock, can apply filter percentage according to its wish.
If a stock still hits circuits, then the stock is moved to T-group where only buying or only selling (but not both during the same day) is allowed.
No intraday trading is allowed.
Apart from the usual circuits, BSE-only stocks have weekly, monthly, quarterly and yearly circuit rates.
This restricts the stock price moment within the week, month and year respectively.
Operator play and Circuits
Heard lot about Operator’s play. What is that? One can manipulate the stock price? If so, one need huge sums of money? Right?
Stock market operators are people who try to make the share price move as they desire. There are several ways they do this.
One of the most common ways in which stock market operator work is by forming a syndicate with each other and targeting companies where a big portion of promoter holding is pledged. i.e poor promoter holding shares or shares of companies where the public holding is large.
Yes. They start by targeting a cheap and thinly traded stock and since they form a syndicate, all of them start buying taking the share price to upper circuit for few days. This forces stock exchange to revise the circuit limit from 20% to 10%.
Because there will be an increase in volumes with increase in price, few technical analysis who solely invest based on charts might get tempted to buy the stock.
Then the operator gives a buy recommendation in mmb, discussion groups, sms, whatsapp groups, facebook etc along with charts to prove that they are right.
This promopts more retail investors to join in. When more people start buying, the share price goes upwards and cupper circuits will happens for few more days. The circuit limits would be revised from 10% to 5%.
At around this time, the operator starts selling their holdidngs gradually and silently but since there are many retail investors who are ready to buy, the offloading by operators will hardly be noticed.
There is a chance that the stock still would be continously hitting upper circuits and might even get revised from 5% to 2%.
By this circuit revision, the operator might have completly exit.
Smart investors identify that the operator has exited and they too start selling and now, the stock is on course of lower circuits.
Poor ignorant investors get stuck at a higher level and cannot come out even after few days of lower circuits.
After few days, the stock daily traded volumes will dry off but the poor retail investor gets stuck at a way higher level.
The whole process requires a lot of money.
Since it is a syndicate play, each one helps the other with the money adjustment part.
In most cases, the syndicates get 2x, 5x and even 10x returns in a matter of few days.
So, beyond the initial entry days, they need not put their own money.
The cyclic money and the gains themselves will be sufficient.
In some cases, promoters intentionally allow operators to play.
They do this so that their company shares are traded will good volumes otherwise the stock exchanges would delist them.
Rule #30: Avoid shares of companies which touch upper circuits or lower circuits frequently and without any reason.
This is why we have the following related rules:
Rule #3: Also avoid companies whose CMP is below Rs 20 (penny stocks).
Rule #28: Avoid companies where promoters pledged their shares
Series of Circuits
In some stocks, particularly those that are operator driven, the stock hits circuits continously for a number of days. Such stocks can either become quick wealth makers or wealth destroyers.
There is no way of finding which direction it moves.
Avoid being into such stocks because they are most likely to be traps than wealth builders.
Circuit for largecap stocks
More than freeshares, the number of investors pushing and pulling will be too many that they hardly can go to circuit. Also Largecaps wont have circuit limits. Their 20% limit gets opened when immediately after touching the 20% mark. I saw Infy and RCOM hitting 20% and having got the limits opened.. So UC in largecaps hardly happen.
How to check for Upper Circuits / Lower Circuit changes of listed companies?
This will be specified by the stock exchange under Notifications and Circulars link. For example, for BSE, it is at http://www.bseindia.com/markets/MarketInfo/NoticesNCirculars.aspx?expandable=0
1. From the stocks that you have invested, are there any stocks that hit circuits recently? If so, deduce the reason for hitting the circuit and analyze the reason for the move.
2. Money Control provides a list of only-buyer stocks at http://www.moneycontrol.com/stocks/marketstats/onlybuyers.php and only sellers stocks http://www.moneycontrol.com/stocks/marketstats/onlysellers.php
Visit the page, take some companies listed on the page at random and identify the reasons why the stock has only-buyers or only-sellers
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