Unlocking the Potential of Lower Circuit Stocks

Unlocking the Potential of Lower Circuit Stocks
Reading Time: 7 minutes

The lower circuit is the lowest spot at which a stock’s price or an index’s value can go. Stocks with high demand for sales but low demand for purchases may fall into the lower circuit stocks category.

In this blog, we will explore the world of lower circuit stocks, including what they are, how they work, what triggers them and how you can sell them. Moreover, we will also tell you the factors and strategies you should consider while investing in lower circuit shares.

What are lower circuit stocks? 

Lower circuit stocks are stocks that are subject to a circuit limit or circuit filter that restricts their price movement. In simpler terms, the prices of these stocks have gone down to the minimum percentage allowed by the stock exchange for that particular trading day.

These stocks are usually stocks of companies that are facing financial distress or other significant issues that are causing investors to sell off their holdings. 

Consequently, these stocks are suitable for investors with a high-risk appetite, as their prices can be volatile and subject to sudden drops. However, they also have the potential for high returns. 

How is the lower circuit limit determined? 

A circuit limit is a mechanism used by stock exchanges to control extreme price movements in a particular stock. In India, the Stock and Exchange Board of India (SEBI) introduced the concept of the upper circuit and lower circuit to safeguard the interest of investors. 

The lower-circuit limit for a stock is determined by the stock exchange on which it is listed. It is based on various factors, such as the volatility of the stock, trading volumes, market capitalization, and other relevant factors. The stock exchange typically sets the lower circuit limit as a percentage of the stock’s previous closing price.

How does trading in the lower circuit stocks work? 

When a lower-circuit in share market is triggered, trading in the stock is halted for a certain period. Usually, 15-20 minutes to allow the market to stabilize before trading can resume. During this period, buyers cannot place bids, and sellers cannot offer their shares for sale. Once the circuit limit is lifted, trading in the stock resumes, and buyers and sellers can place their orders again.

But when the trading of stocks in lower circuit resumes, there is usually a rush of buy orders. As investors look to buy the stock at a lower price. This can lead to a sudden increase in the stock’s price, but the stock’s price movement is still subject to the upper circuit limit, which restricts the stock’s price rise to a certain percentage in a single trading session.

For instance, if a lower-circuit is set at 5%, then the price of a lower circuit stock cannot fall more than 5% in a single trading session. This means that once the stock reaches the lower circuit, trading in the stock is halted for a certain period. Usually 15-20 minutes, to allow the market to stabilize before trading can resume.

Factors that can trigger lower circuits

  • News and announcements: Negative news or announcements related to the company, such as poor financial results or a major legal issue, can trigger a lower circuit by leading to a sell-off of the company’s shares.
  • Liquidity concerns: Lack of liquidity in the market for a particular stock can trigger a lower-circuit in stock market. There may not be enough buyers or sellers in the market to maintain a stable price for the stock.
  • Market sentiment: Negative market sentiment due to various factors can trigger lower circuits. Some of these factors are political instability, global economic conditions, and geopolitical tensions,
  • Technical factors: Technical factors such as support and resistance levels, moving averages, and trend lines can trigger lower-circuits if the stock price breaches key technical levels.

Factors to consider while investing in lower circuit stocks

Investing in a lower circuit stock can be rewarding. However, here are some factors that you should consider while investing in them: 

Fundamentals of the company

Before investing in a lower circuit stock, it’s important to evaluate the fundamental factors of the company. This includes the company‚Äôs financial performance, management, competitive positioning, and growth prospects. 

This can help investors determine whether the company has a solid business model and is capable of generating sustainable returns over the long term.

Market conditions

Market conditions can have a significant impact on the performance of lower circuit shares. It’s important to evaluate the broader market conditions and trends, as well as any specific factors that may be affecting the sector or industry in which the company operates.

Trading volumes

Trading volumes can be an important indicator of market sentiment and investor interest in a particular stock. Low trading volumes may indicate a lack of investor interest or liquidity, while high trading volumes can indicate strong investor demand.

Risk management

Investing in stocks hitting lower circuit can be risky, and it’s important to have a well-defined risk management strategy in place. This can include setting stop-loss orders, diversifying your portfolio, and investing only a portion of your capital in lower circuits.

Valuation

Valuation is an important factor to consider when investing in lower-circuit stocks. It’s important to evaluate whether the stock is undervalued or overvalued based on its earnings, cash flow, and other key metrics to compare its valuation to that of its peers.

Strategies for investing in lower circuit stocks

Here are three strategies you should consider to make an informed decision while investing in lower-circuit shares:

Fundamental analysis for lower circuit stocks

One approach is to analyze the company’s financials, including its revenue, profit margins, debt, and cash flows. By looking at the company’s fundamentals, you can determine if it has the potential to grow and generate profits over time. 

You can also consider the management team’s experience and track record in the industry. If the company has strong fundamentals and the management team has a history of success, it may be a good long-term investment, despite the current low circuit price.

Technical analysis for lower circuit stocks

Another approach is to look at the stock’s price movements and chart patterns. Technical analysis involves examining price trends, trading volumes, and other technical indicators to identify patterns and trends. 

This analysis can help you determine whether the stock is oversold or undervalued and whether it’s a good time to buy.

Contrarian approach for lower circuit stocks

A contrarian strategy is to take a contrarian approach and invest in companies others avoid. This approach involves looking for companies that are experiencing temporary setbacks or negative news that has caused the stock price to drop. 

By investing in these stocks, you can take advantage of the market’s pessimism and profit when the stock rebounds.

How to exit from lower circuit stock?

Exiting from a lower circuit stock can be challenging because the stock is trading at its lower circuit limit. This means there are no buyers available in the market to buy the stock from you. However, here are a few tips for you on how to sell stock in lower circuit :

Wait for the circuit to lift

The lower circuit in stock market is usually lifted after a specific period, which can be a day, a week, or longer, depending on the stock’s volatility. When the circuit is lifted, the stock can trade freely, and you may be able to sell your shares at a better price.

Place a sell order at the upper circuit limit

If you’re confident that the stock’s price will rise, you can place a sell order at the upper circuit limit. This way, when the circuit is lifted, your sell order will be executed automatically, and you can sell your shares at a potentially higher price.

Seek help from a broker

You can also seek help from a broker who can help you find a buyer for your shares, even if the stock is trading at the lower circuit limit. However, keep in mind that this may come at a higher cost, such as a brokerage fee or commission.

List of Popular Lower Circuit Stocks 

Check out the lower circuit stocks list below – 

Serial No.Lower Circuit Stocks NSELower Circuit Stocks BSE
1. Sobha Sarvottam Finve.
2.Astron PaperNewtime Infra.
3.Gokul RefoilsShukra Bullions
4.Supreme Engg.Press. Sensitive
5.Mittal Life StylKashyap TeleMed.
6.Kohinoor FoodsSwarna Securities
Lower Circuit Stocks on NSE and BSE

Lower circuit stocks can be a high-risk, high-reward investment. While investing in these stocks can offer great returns, it’s important to do your due diligence and understand the potential risks involved. You can also follow the strategies discussed in this blog and use lower circuits to your advantage.

Moreover, to get balanced portfolios that make the most of such phenomena in the markets, you can try smallcase. It offers investors a range of curated investment portfolios that are built around specific themes and investment strategies.

So, what are you waiting for? Download the smallcase app today and start your investment journey!


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