In October 2022, Delta Corp’s stock soared to its 52-week high of Rs. 299.40 on the Bombay Stock Exchange (BSE). This was a result of the gaming and hospitality company publishing its financial results for the July-September quarter which showed it to be in a stronger position.
With the reported net loss coming down from Rs. 54.9 crore in the previous quarter to Rs. 22.6 crore and significantly increased gross income, the company’s prospects looked good.
Once, Delta Corp’s stock reached the 52-week high, however, there was a stock freeze. It sounds baffling, doesn’t it? Why would there be a stock freeze when the price was soaring! That’s because the Indian stock market has a circuit breaker system in place and Delta Corp’s stock hit the upper circuit.
What is a Circuit Breaker?
The one thing the stock market today is infamous for is its inherent volatility. Just about any positive or negative news or development, macro or microeconomic can cause the price of a stock to sharply rise or fall. This includes inflation and interest rates, political shocks, economic policy changes, dividend announcements, investor sentiments, and as in the case of Delta Corp, released financial results.
To restrict stock market volatility beyond a certain limit, the Securities and Exchange Board of India (SEBI) introduced an index-based circuit breaker system in 2001 for the entire stock market.
This means that there is a circuit limit or a price band in place for the stock exchanges as well as for individual stocks. Stocks can only be traded in that price band on any given day. If an index or a stock hits the upper circuit or upper price limit as Delta Corp did, the circuit breaker is triggered and there is a halt in the trading activity.
Read more: Advantages of Investing in FAANG Stocks
What does this Mean?
When the circuit breaker is triggered all the stock market orders remain pending at that circuit price for the halt duration. The trading halt usually lasts around 45 minutes, but the duration depends on the degree of rising or fall as well as the timing of the halt.
For an index, the circuit breaker is triggered at three stages – 10%, 15%, and 20%. That means that if the price falls or rises by more than 10%, 15%, or 20%, there will be a coordinated halt in the stock market.
As for stocks, the upper and lower circuit limits depend on the nature, volume, and liquidity of the stock and can range anywhere from 2% to 20%. For Delta Corp, the price band is 10% and so when its stock price soared to Rs. 299.4, it hit the upper limit and triggered the circuit breaker.
When looking for stocks to buy today, you can check the circuit limit of each stock on the official website of the stock exchange it is listed on like the BSE or the National Stock Exchange (NSE).
When the stock hits the upper circuit, there will be no sellers, just buyers in the stock market. Conversely, when the stock hits the lower circuit, there will be no buyers, only sellers.