Why do stocks hit the lower circuit and how do sell and buy stocks which have hit the lower circuit

1. Why do stocks hit the lower circuit and how do sell and buy stocks which have hit the lower circuit? What is Lower Circuit? A lower circuit is put in place to restrict a continuous spiral down of a stock’s price beyond a predefined percentage. The lower circuit defines the lowest tradable price for a stock in a particular trading session. The stock will be ‘frozen’ at the lower circuit until the time there are no fresh buyers who come to the rescue. When a stock hits its lower circuit, there will only be sellers and no buyers, but because the stock is already trading at the lower circuit, no more sell orders are entertained. However, buy orders will be executed without any hindrance because the lower circuit is put in place to restrict further selling, not buying. Why do stocks hit the lower circuit? There may be varied reasons for stock to slump; it could be a domino effect of index-wide selling or industry-wide selling. It could be because of a negative news development about a particular stock, like the exit of senior key management personnel, or disruption of a potential deal for the company.

2. It could be because of big investors/AMCs pulling out their investments or FIIs and DIIs making some block deals. You cannot even rule out the possibility of an operator game. Therefore, the reason could be anything and by the time, you will find out the root cause behind the fall, the damage would have been done. Can you sell a stock locked in the lower circuit? No, because this would demean the very concept of applying circuit breakers, which is to arrest any further fall in the stock. At the lower circuit, there are only sellers and no buyers, thus selling orders will not be executed because there are no buyers for the stock at the underlying price. During the day, the stock will remain frozen at the lower circuit unless fresh buyers come to the rescue. In such situations, intraday buyers are in a quandary because intraday trading requires you to square off your positions before the trading activity is halted for the day. However, due to the stock being locked in the lower circuit, they cannot sell their positions. Here, the intraday positions will automatically be converted into delivery, and the trader will be required to maintain sufficient balance in his trading account to take delivery of the positions by the next trading session. In case the trader fails to do so, the broker will sell the stocks for the shortfall amount in the next trading session. Conclusion: A lower circuit is a tool put in place by SEBI to arrest any unusual dip in stocks. The lower circuit ensures no further selling during the trading session as at the lower circuit there are no buyers and only sellers. Lower circuit levels are decided by SEBI and are subject to periodic review based on liquidity and volumes the stock is amassing. Download the Teji Mandi App to get the latest updates on the fluctuations in the stock market. With real-time updates, we ensure that you do not miss any investing opportunities. Read more about lower circuit