What is a price limit in the stock market? Is trading possible even if the limit is reached?

In the stock market, we often hear the terms "limit up" and "limit down." These are phenomena in stock trading and are important indicators that investors pay attention to. Limit up and limit down represent extreme situations in stock price fluctuations, indicating the presence of overwhelming buy orders or sell orders in the market. So, how do we determine the price range limits of stocks, and what happens to trading when these limits are reached?

What are circuit breakers (stop high and stop low)?

What is a stop high?

A stop-high refers to a state where the stock price has risen to the specified upper limit and cannot rise any further.

What is a stop limit?

In contrast to the limit up, the limit down means that the stock price has fallen to the specified lower limit and cannot fall any further.

For example, in the Taiwanese market, the daily price fluctuation range for listed and over-the-counter stocks is set within 10% of the previous day's closing price. If TSMC's previous day's closing price was 600 Taiwanese dollars, then TSMC's stock price on that day would fluctuate within the range of a maximum of 660 Taiwanese dollars and a minimum of 540 Taiwanese dollars.

How to Identify If Stocks Have Reached Their Upper or Lower Limits

If the stock price is not moving and the chart is a straight line, it is highly likely that the stock has reached its upper or lower price limit. In the Taiwan market, stocks that have reached the upper limit are displayed in red, while those that have reached the lower limit are displayed in green.

In the case of a limit up, there are many buy orders while there are almost no sell orders. This is because the number of people wanting to buy stocks greatly exceeds the number of people wanting to sell, which causes the stock price to reach the limit up.

On the other hand, in the case of a stop loss, the opposite occurs, where the number of people wanting to sell significantly exceeds those wanting to buy, resulting in a situation with numerous sell orders and hardly any buy orders.

Is trading possible during the upper and lower price limits?

Even when stocks reach their upper or lower price limits, trading itself is still possible. However, there are some points to be aware of.

In the case of a stop-high:

• Buy order: Possible, but there is a high likelihood that it will not be executed. This is because many buy orders are waiting at the stop-limit price.
• Sell order: It is possible and has a high likelihood of being executed immediately. This is because many buyers are waiting.

In the case of a stop-limit order:

• Buy order: It is possible and has a high chance of being executed immediately, as many sellers are on standby.
• Sell order: It is possible, but there is a high possibility that it will not be executed. This is because many sell orders are waiting at the stop-loss price.

Price Limit and Circuit Breaker System in Various Countries' Markets

Unlike the Taiwan market, there are no strict price limits in the Hong Kong and US markets, but a circuit breaker system has been introduced.

The circuit breaker system is a mechanism that temporarily halts trading when stock prices fluctuate beyond a certain range, and then resumes trading after a specified period.

The circuit breaker in the US market applies to both the entire market and individual stocks.

Market-wide circuit breaker: If the S&P 500 index falls by 7% or 13%, trading will be halted for 15 minutes. If it falls by 20%, trading for the day will be finished.

Individual stock circuit breaker: If the stock price fluctuates beyond a certain range within a short period, trading of individual stocks will be temporarily suspended. For example, if it fluctuates by more than 5% within 15 seconds, trading will be suspended for 5 minutes. The specific fluctuation range and suspension time vary depending on the type of stock.

Market | Individual Stock Price Fluctuation Limits | Price Fluctuation Control Methods --- | --- | --- Taiwan | 10% price fluctuation limit | Price is fixed when the limit is reached US | None | Trading will be temporarily halted if it exceeds a certain range (e.g., 10%) Hong Kong | None | Adopts a circuit breaker system. Trading is halted when the entire market or index falls by a certain percentage. Maintains market stability through information disclosure and market monitoring systems.

Investor Response Strategies During Limit Up and Limit Down

###1### Strive for calm judgment and avoid blind following.

When stocks reach their daily limit up or limit down, a common mistake that beginner investors make is to blindly follow the trend. However, it is important to analyze the reasons behind the sudden fluctuations in stock prices and make trading decisions based on that analysis.

For example, if a certain stock reaches its stop-loss limit, and there are no fundamental issues with the company, but it is due to market sentiment or temporary factors, there is a possibility of recovery afterward. In this case, it may be the best strategy to consider holding or making small additional purchases.

Conversely, if a certain stock reaches the upper limit, it is necessary to analyze the presence of favorable factors and their sustainability. If continuous growth is not expected, waiting and seeing would be the best option.

( )2### Investment in related stocks and US stocks

If a certain stock hits the upper limit due to favorable factors, it may be worth considering investing in other companies closely related to that enterprise or stocks within the same sector. For example, if TSMC's stock price hits the upper limit, other semiconductor-related stocks may also rise.

Alternative Trading Methods When Stocks Cannot Be Purchased

If you cannot buy stocks directly, you may consider related derivative transactions. For example, there are individual stock futures, options, and warrants. However, these derivative transactions have certain trading conditions and may not be suitable for beginners or small investors.

As a result, CFDs (Contracts for Difference), which have no price limits and relatively low trading hurdles, have become a common choice.

CFDs are contracts that trade on stock price fluctuations, allowing for buying and selling operations similar to stocks. Compared to directly trading stocks, CFDs offer higher leverage, lower trading barriers, and greater flexibility, making them suitable for small-scale investments.

Features of CFD:

• Available for trading 24 hours
• Flexible leverage settings
• There are opportunities to profit whether stock prices rise or fall.

In CFD trading, two prices are offered: "Sell Price (SELL)" and "Buy Price (BUY)".

• Selling Price (SELL): If investors anticipate a price decline, they can initiate a "short position" at the current "selling price."
• Buy Price (BUY): If an investor anticipates a price increase, they can initiate a "long position" at the current "buy price."

Summary

Price limits are one of the mechanisms that stabilize the market. The Taiwan market has a price limit of 10%, but the Hong Kong and U.S. markets do not have strict price limits in the same sense. Even if a stock reaches its upper or lower price limit, orders can still be placed as usual, but execution is not guaranteed. If you really want to trade, you can consider alternative options such as related stocks, U.S. stocks, derivatives, or CFDs.