Investing in the stock market is an exciting but volatile journey. Investors often come across terms like upper circuit and lower circuit, especially during market fluctuations. One of the most common questions that arise is: What happens when a stock hits the lower circuit? and Can you still buy a stock that has hit the lower circuit?
In this comprehensive guide, we will discuss what a lower circuit is, why stocks hit the lower circuit, and whether or not you can buy a stock during the lower circuit. We will also dive into the strategies, risks, and opportunities associated with trading stocks that hit the lower circuit.
What is a Lower Circuit in Share Market?
The lower circuit in the share market is a price band or a threshold set by the stock exchanges to prevent excessive price movement of a particular stock in a single trading day. When the price of a stock falls to this predetermined lower limit, trading is either halted or heavily restricted to prevent further decline.
The lower circuit is set as a percentage decrease from the previous day's closing price. This percentage varies based on the stock's volatility and the exchange's rules. It can typically be 2%, 5%, 10%, or 20%.
For example:
If a stock closed at INR 100 yesterday and the lower circuit limit is 10%, the stock can fall to a maximum of INR 90 before hitting the lower circuit.
Why Does a Stock Hit the Lower Circuit?
There are various reasons why a stock may hit the lower circuit. Some of the most common reasons include:
1. Negative News or Earnings Reports
A company may announce negative news such as poor quarterly earnings, bad financial results, legal issues, or management changes. This can lead to panic selling, pushing the stock to its lower circuit.
2. Market Sentiment
A negative sentiment in the overall market or sector can cause a stock to hit the lower circuit. For example, during the COVID-19 pandemic, many stocks hit their lower circuits due to negative market sentiment.
3. Panic Selling by Retail Investors
When retail investors panic due to unexpected market fluctuations, they start selling their stocks rapidly, causing the stock price to hit the lower circuit.
4. Global or Domestic Events
Global events like wars, pandemics, natural disasters, or economic slowdowns can lead to a lower circuit in many stocks.
5. Manipulation or Pump and Dump Schemes
Sometimes, certain stocks are manipulated through pump and dump schemes. When the price is artificially inflated and then dumped, it may hit the lower circuit.
Can You Buy a Stock That Hits the Lower Circuit?
Investors often ask this question the most. The short answer is: Yes, you can buy a stock that has hit the lower circuit, but it is extremely challenging.
Why Is It Difficult to Buy a Stock in Lower Circuit?
When a stock hits the lower circuit, there is an imbalance between sellers and buyers. There are many sellers who want to sell their shares, but very few or no buyers. As a result, the stock continues to hit the lower circuit, and it becomes difficult to execute a buy order.
In technical terms, the best available ask price keeps declining and remains stuck at the lower circuit level, preventing any trade execution.
How Can You Buy a Stock in Lower Circuit?
Although it is difficult, it is not impossible to buy a stock that has hit the lower circuit. Here are some practical strategies to increase your chances of buying such a stock:
1. Place a Pre-Open Market Order
The pre-open market session occurs before the regular market opens. You can place a buy order during this time, and if there is a slight imbalance in supply and demand, your order may get executed.
2. Use a Limit Order
Instead of placing a market order, you should place a limit order at the lower circuit price. This increases the probability of your order getting executed when the stock opens slightly higher.
3. Monitor the Market Closely
Keep a close watch on the stock and market conditions. If you notice any positive news or signs of recovery, place your order immediately.
4. Check Buyer and Seller Quantity
Stock exchanges provide real-time data on the number of buyers and sellers. If you see the number of buyers increasing, you can attempt to place your buy order.
Risks of Buying a Stock in Lower Circuit
While the opportunity to buy a stock at a low price is tempting, there are inherent risks involved. Here are some major risks:
1. Continuous Lower Circuits
A stock can continue to hit the lower circuit for several days in a row. This can lead to huge losses if the price continues to fall.
2. Company Fundamentals
In many cases, the stock may be hitting the lower circuit due to fundamental problems in the company such as poor financials, regulatory issues, or management failures.
3. Liquidity Issues
Even if you manage to buy the stock at a lower circuit, you may find it difficult to sell the stock later due to low demand.
4. Pump and Dump Scams
Be cautious about stocks manipulated through pump and dump schemes. Such stocks may hit lower circuits continuously after the dump.
Is It a Good Idea to Buy Stocks in Lower Circuit?
Buying stocks in lower circuits can be profitable but comes with high risk. It is advisable to consider the following before making a decision:
When Should You Buy?
If the stock has strong fundamentals and the lower circuit is triggered due to temporary bad news.
If the overall market trend is positive but the stock is down due to panic selling.
If you have done thorough research and believe the stock will recover.
When Should You Avoid?
If the stock is fundamentally weak.
If the lower circuit is triggered due to fraudulent activities or regulatory actions.
If the stock has low liquidity and high volatility.
Conclusion
The lower circuit in the share market acts as a protective mechanism to prevent excessive price falls in a single day. While it is challenging to buy stocks in the lower circuit, it is not impossible. However, investing in such stocks requires thorough research, proper risk management, and an understanding of market sentiment.
If you plan to buy a stock in the lower circuit, always evaluate the company fundamentals, market conditions, and reasons behind the lower circuit. This will help you make a more informed and profitable investment decision.
Read more:-
. How to Find Under-the-Radar Investment Opportunities in 2025
. The Future of Investing: How the Global Stock Market Will Evolve in 2025
• Stock Market Derivatives: Meaning, Types, and Real-Life Examples
• Understanding MTF: How to Trade Stocks on Margin Like a Pro
• The Stock Market Explained: A Simple Guide for 2025 Beginners
FAQ:
1. What is a Lower Circuit in the Share Market?
A lower circuit in the share market is a price limit set by the stock exchange to control excessive price declines in a single trading day. When a stock’s price falls to the predetermined lower limit, trading is either halted or heavily restricted to prevent further price collapse.
The lower circuit is usually set at 2%, 5%, 10%, or 20% below the previous day’s closing price. Once the stock hits the lower circuit, it becomes difficult for buyers to purchase the stock due to a lack of demand.
2. Why Does a Stock Hit the Lower Circuit?
A stock can hit the lower circuit due to several reasons, including:
a. Negative News or Earnings Reports
If a company releases poor financial results, faces legal troubles, or announces negative news, it can trigger panic selling, pushing the stock to hit the lower circuit.
b. Overall Market Sentiment
A negative trend in the overall market or a particular sector can lead to widespread selling, causing multiple stocks to hit their lower circuit. This often happens during economic slowdowns, recessions, or market crashes.
c. Panic Selling by Investors
When retail investors panic due to sudden negative news or price drops, they may start selling their stocks rapidly, causing the stock to hit the lower circuit.
d. Global or Domestic Events
Major global events such as wars, pandemics, natural disasters, or economic crises can affect market sentiment, resulting in stocks hitting their lower circuits.
e. Pump and Dump Schemes
In certain small-cap stocks, manipulators artificially inflate the stock price (pump) and then sell off their shares (dump), causing the stock to hit the lower circuit.
3. Can You Buy a Stock That Has Hit the Lower Circuit?
Yes, it is possible to buy a stock that has hit the lower circuit, but it is extremely challenging due to the imbalance of demand and supply. When a stock hits the lower circuit, the number of sellers is very high, while buyers are very few or none, making it hard to execute a buy order.
4. Why Is It Difficult to Buy a Stock in Lower Circuit?
The primary reason it is difficult to buy a stock in the lower circuit is the lack of demand. When a stock hits the lower circuit:
- Sellers outnumber buyers.
- The stock price remains locked at the lower circuit price.
- Orders placed may not get executed due to insufficient demand.
This imbalance prevents the price from rising, making it extremely difficult to buy the stock.
5. How Can You Buy a Stock That Has Hit the Lower Circuit?
Although challenging, here are some practical strategies to buy a stock in the lower circuit:
a. Place a Pre-Open Market Order
Before the market officially opens, there is a pre-open market session where orders can be placed. Placing a buy order during this session increases the chances of your order being fulfilled, especially if the stock shows signs of recovery.
b. Use a Limit Order
Instead of placing a market order, place a limit order at the lower circuit price. This increases the probability of securing the stock if there is any sudden demand or positive market movement.
c. Monitor Buyer and Seller Quantity
Track the real-time data showing the number of buyers and sellers for the stock. If you notice an increase in buyer interest, quickly place a buy order to increase your chances.
d. Act Quickly on Positive News
If positive news emerges, such as favorable government policies or business developments, it may trigger a reversal in stock price. Placing a buy order during this phase can increase your chances of securing the stock.
6. What Are the Risks of Buying a Stock in Lower Circuit?
While buying a stock in the lower circuit may seem like a great investment opportunity, it comes with significant risks:
a. Continuous Lower Circuits
The stock may continue to hit the lower circuit for several consecutive days, causing its value to decline significantly and resulting in heavy losses.
b. Weak Company Fundamentals
If the lower circuit is caused by poor financials, management issues, or regulatory actions, the stock may continue declining without any recovery, leading to major losses.
c. Liquidity Issues
Even if you manage to buy the stock, you may face difficulty selling it later due to low demand. This can cause your money to remain stuck.
d. Pump and Dump Scams
Small-cap stocks often become targets for pump and dump scams, where prices are artificially inflated and then dumped. Once the price crashes, the stock may remain stuck in the lower circuit for a long time.
7. Is It a Good Idea to Buy Stocks in Lower Circuit?
Buying a stock in the lower circuit can be profitable only in certain situations. It is important to carefully analyze the stock before making a decision.
When Should You Buy?
- If the stock has strong fundamentals and the lower circuit was caused by temporary negative news or panic selling.
- If the overall market is stable, and you believe the stock will recover.
- If you notice increasing buyer interest or positive sentiment returning.
When Should You Avoid?
- If the stock has weak fundamentals, heavy debt, or poor management.
- If the stock is a result of a pump and dump scheme.
- If there are no signs of market recovery or positive demand.
8. Can You Sell a Stock That Has Hit the Lower Circuit?
Selling a stock that has hit the lower circuit is extremely difficult. Since the stock price is declining and demand is very low, finding a buyer is nearly impossible until the stock price stabilizes.
9. What Should You Consider Before Buying a Lower Circuit Stock?
If you are planning to buy a stock that has hit the lower circuit, consider the following:
- Check Company Fundamentals: Verify the company’s financial health, business model, and long-term growth potential.
- Understand Market Sentiment: Analyze if the price drop is due to market fluctuations or genuine company problems.
- Avoid Manipulated Stocks: Avoid stocks with low market capitalization that are prone to manipulation.
- Have a Stop Loss Strategy: Set a stop-loss limit to minimize potential losses if the stock continues to decline.
10. Can a Stock Hit the Lower Circuit for Consecutive Days?
Yes, a stock can hit the lower circuit for several consecutive days if there is continuous selling pressure. This can happen when:
- Negative news continues to affect the stock.
- Investors continue panic selling.
- The company has poor fundamentals with no positive outlook.
In extreme cases, stocks have been known to hit the lower circuit for weeks or months.
11. Should You Invest in Lower Circuit Stocks for Long-Term?
Investing in lower circuit stocks for the long term is only advisable if:
- The company has strong fundamentals.
- The price drop is temporary due to market sentiment or negative news.
- You have conducted thorough research and are confident about future recovery.
However, avoid investing in stocks with:
- Weak financials.
- Regulatory or legal issues.
- No market demand.