Suzlon Energy, Reliance stocks hit upper circuit. What does it mean?

The maximum level to which a stock's price can rise in a day is called an upper circuit. When a stock hits an upper circuit, the stock usually has a majority of buyers or falls in the Only Buyers' category, as the demand for the share increases and no seller wants to sell stocks of a company whose price is set to rise. 

We have all dreamt of buying shares in the hope that the share prices rise by 25%, 50%, and 100% in a day and we become millionaires instantly! However, unfortunately, that doesn't happen in real life thanks to something called circuit breakers.

You might have read headlines that sound like: 'Suzlon Energy freezes at 20% upper circuit on heavy volumes' or 'Reliance hits upper circuit of 10%'. But what does this mean? 

What is an upper circuit? Well, every stock has a higher and a lower bandwidth (ie, a limited price range within which the shares can be traded) within which it can trade every day. This range or bandwidth changes on the basis of the previous day's closing price. A stock can have a higher and lower bandwidth of anywhere between 2 to 20% of the previous day's closing price.   

So, say for example a stock has a circuit breaker at 20% and its closing share price yesterday was Rs 100. This means that the stock price

• can go to a maximum of Rs 120 (ie 100+20%), which is called an upper circuit;
• or to the lowest price of Rs 80 (ie 100-20%), which is called a lower circuit.

If the stock hits the highest limit, the trading will freeze.

Why does this happen? Since stock movements depend on market sentiments, the prices keep fluctuating depending on the positive and negative news in the market. The stocks can hit the upper circuit for many reasons:

• Earnings of the company are over investors' expectations 
• Changes in trade scenarios
• If the company has good news for investors, etc.

SEBI decides the circuits so that it can control the losses and limit the surprises for investors. It also helps in stopping unwanted price manipulation. 

What next? When stocks hit their upper circuit levels, trading is usually halted since there are only buyers in the market for that stock and no sellers. Trading can resume once the price has fallen or if someone decides to sell the shares at the circuit price.