How much can a share price rise or fall in a day?
On May 18, 2009, the Bombay Stock Exchange benchmark index Sensex went up 2099.21 points or 17.24% and National Stock Exchanges index Nifty was locked 636.40 points up or 17.33%.
Investors were euphoric after the UPA emerged victorious in the 2009 general elections. Read the complete story here- Sensex creates history; two upper circuits in one day.
I intentionally choose the day when Sensex skyrocketed, just to start this post with a happy note. In the similar way, Sensex has also fell hundreds of point on a single day.
Also read: The 10 Biggest falls in Sensex History
Now, moving forward to stocks, we can easily found a number of companies whose share price increase 10-20%+ in a day. For example:
The key question here is how much can a share price rise or fall in a day? Is there a limit to this change or the share price can explodingly increase or decrease to any price in a day?
Moreover, how does the stock market really works? How much can the market plunge or crash in any day?
I’m going to answer all these questions in this post. By the end of this post, you will understand how much can a share price rise or fall in a day i.e. what’s the maximum gain/loss possible in a single day?
However, to answer this question, you’ll need to understand the concept of price band and circuit breaker.
Also read: What is the Right Time to Exit a Stock?
What is the ‘PRICE BAND’ in stocks?
Price bands are used to control the extreme volatility in the stocks. It is a specific limit beyond which the share price of a company cannot rise or fall.
Different stocks have different price band which ranges from 2%, 5%, 10% and 20%.
This band is decided by the stock exchange based on the price movement history of the share. Further, the price band on a particular day is based on the previous day closing price.
Let’s say, there is a company ABC whose price band is 10% and the closing price of last day is Rs 100.
Here, the upper price band will be 10% greater than the last day closing price (Rs 100). Therefore, the upper price band = Rs 110.
Similarly, the lower price band will be 10% lower than the last day closing price (Rs 100). Therefore, the lower price band = Rs 90.
Overall, on that day, the share price of company ABC can move between Rs 90 to Rs 110. The share price cannot go beyond this limit.
In case, the stock hits its lower/upper circuit, then its trading is suspended for the day or until the share price comes below the circuit range.
When the stock hits the upper price band, then the investors who had already bought the stock have an advantage (as there are only buyers in this scenario). On the other hand, when the stock hits the lower price band, then the investors are in trouble as they couldn’t find buyers (only sellers in this scenario) until normal trading starts in that stock.
Here are few examples of companies with different price bands:
HPCL (10% Price Band)
(Image source: Money Control)
Future Consumers Ltd (20% price band)
(Image Source: Money control)
In addition, if the stock price keeps hitting the limit, the stock exchange may reduce its price band to decrease the volatility. You can find the list of the companies whose price band changes from the next trade date on the NSE/BSE website.
Here’s an example of the list of companies with changed price band on 9th Jan 2018.
Source: NSE PRICE BANDS
Now that you have understood the concept of price bands, let’s move forward to another important concept- Circuit breakers.
What is a circuit breaker?
When I was doing my graduates in electrical engineering, I studied the concept of the circuit breaker in an electric circuit.
A circuit breaker is an automatic device for stopping the flow of current in an electric circuit as a safety measure in case the electric current goes beyond a specific limit.
The same concept of the circuit breaker is used in the share market to limit the movement of the market beyond a specific limit in a day.
How does CIRCUIT BREAKERS work?
The Indian stock exchanges have implemented the index based circuit breakers according to the guidelines of SEBI w.e.f 02 July 2001.
According to the SEBI rules:
The circuit breakers for the indexes will be applied at 3 stages, whenever the index crosses 10%, 15%, and 20% level.
The stock exchanges calculate these Index circuit breaker limits for 10%, 15% and 20% levels based on the previous day’s closing level of the index.
When these circuit breakers are triggered, it will result in a trading halt in all equity and equity derivative markets nationwide. This means that if the index crosses its first stage of 10%, the trading will halt in entire India.
Moreover, this circuit breaker can be triggered by the movement of any of the market index whichever crosses the limit level first. Let’s say Sensex fell above 10% and nifty is still at 9.7% down, in this scenario, the circuit breaker is triggered as Sensex has breached the level. The circuit breaker does not require all the indexes to breach and either one crossing the level will trip the circuit breaker.
After the first circuit filter is breached, the market will re-open with the pre-open call auction session after a specified time. The extent of market halt and the pre-open session is given below:
Source: NSE Circuit Breakers
Let’s understand the concept of circuit better with the help of the same example discussed in the starting of this post.
On May 18, 2009, the Sensex opened at 10.73% or 1305.97 points higher at 13479.39. And The Nifty was locked at 4203.30, higher by 14.48% or 531.65 points. The trading was halted for two hours as the index touched the upper circuit one minute after trading began.
However, as soon as the market re-opened the indices hit the upper circuit again, and trading was halted for the entire day today. The S&P CNX Nifty hit the upper circuit of 20.53%, whereas the Sensex rocketed up by 2,110.79 points at 14,272.63, up 17.34 percent. Read more here.
How much can a share price increase in a day depends on its price band. There are four price bands for stocks in India- 2%, 5%, 10% and 20%, which is decided by the stock exchange.
If the price band of a company is 10%, then it can rise or fall, only 10% on that entire day of trading.
Further, the indexes also have circuit breakers which work on 3 stages- 10%, 15%, and 20%. In case, the limit is breached by any either, the circuit breaker is tripped and all the trading on the stock exchange comes to a halt. The trading will re-open according to the specified guidelines of the SEBI.
That’s all. I hope this post is useful to the readers. Happy Investing.
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Tags: How much can a share price rise or fall in a day, price band, circuit breaker, price band limit, upper and lower circuit in stocks