Price limit

Price limit refers to the maximum or minimum price set by a regulatory authority or an exchange for a particular security, commodity, or financial instrument during a trading session. Price limits are designed to prevent extreme volatility and protect investors from significant losses.

Types of Price Limits

Price limits can be categorized into two main types:

• Upper Price Limit: The highest price at which a security or commodity can be traded during a trading session.
• Lower Price Limit: The lowest price at which a security or commodity can be traded during a trading session.

Purpose of Price Limits

The primary purposes of price limits include:

• Preventing market manipulation and excessive speculation.
• Reducing market volatility and maintaining orderly trading.
• Protecting investors from sudden and significant losses.
• Allowing time for the dissemination of important information.

Implementation of Price Limits

Price limits are commonly used in stock exchanges, commodity exchanges, and futures markets. The specific limits can vary depending on the exchange and the type of security or commodity being traded. For example, the New York Stock Exchange (NYSE) and the Chicago Mercantile Exchange (CME) have their own rules and thresholds for price limits.

Price Limit Rules

Different exchanges have different rules for implementing price limits. Some common rules include:

• Daily Price Limits: The maximum and minimum prices at which a security or commodity can be traded within a single trading day.
• Circuit Breakers: Mechanisms that temporarily halt trading if the price of a security or index moves beyond a certain threshold within a short period.

Examples of Price Limits

• In the futures market, price limits are often set as a percentage of the previous day's closing price.
• In the stock market, price limits can be set as fixed dollar amounts or percentages of the current trading price.

Criticism of Price Limits

While price limits are intended to stabilize markets, they can also have some drawbacks:

• They may delay the natural price discovery process.
• They can create artificial barriers that prevent the market from reaching its equilibrium price.
• In some cases, they may lead to increased volatility once the limits are lifted.

Related Pages

• Stock exchange
• Commodity exchange
• Futures market
• Market manipulation
• Market volatility
• Circuit breaker