Recently, some friends asked me what exactly does it mean when a stock hits the limit up or limit down, and whether you can buy or sell at those times. Actually, this is a common confusion for many beginners, so I’ll share my understanding.

Simply put, a limit up is when the stock price rises to the daily maximum, and a limit down is when it falls to the daily minimum. Taiwan’s stock market rules state that the daily price change for individual stocks cannot exceed 10% of the previous day’s closing price. So, if TSMC closed at 600 yuan yesterday, the highest it can go today is 660, and the lowest is 540. When viewing the market, stocks that hit the limit up are marked with a red background, and those hitting the limit down are marked with a green background, making them easy to identify at a glance.

Can you trade when a stock hits the limit up or limit down? Of course. But you need to be aware of the difficulty in executing trades. When a stock hits the limit up, there are many buyers lining up, so your buy orders may not be filled immediately, but sell orders are almost instantly matched. Conversely, at the limit down, many want to sell, so your buy orders will be filled quickly, but sell orders will need to wait in line. The logic behind selling at the limit down is quite important—if a stock is about to hit the limit down, it’s best to place a sell order during the opening auction, because the trading rules prioritize price and then time. The earlier you place your order, the higher your priority, and the greater your chance of getting filled.

The reason stocks hit the limit up is usually due to positive news, hot topics, or large investors locking in their positions. For example, if TSMC gets a big order or AI concept stocks see soaring demand, their prices tend to hit the limit up quickly. Conversely, limit downs happen due to negative news, earnings reports crashing, or market panic, where selling pressure causes prices to plummet. During the COVID outbreak in 2020, many stocks hit the limit down as a systemic risk example.

The most important thing when encountering limit up or limit down is to stay rational. Many beginners rush to buy when they see a limit up, or sell in panic at a limit down, often resulting in losses. My approach is to first understand why the stock hit the limit—whether it’s due to company fundamentals or market sentiment—before deciding whether to act. If it’s just market emotion dragging the stock down and the company’s fundamentals are sound, a limit down might actually be a good opportunity to buy cheaply. Conversely, don’t rush to chase a limit up; first confirm whether the positive news can sustain the upward momentum.

Another strategy is trading related stocks. When TSMC hits the limit up, other semiconductor stocks often move in tandem, so you might consider buying related stocks. If you want to invest directly in Taiwanese companies, U.S. markets also offer opportunities. For example, TSMC is listed on U.S. exchanges, and you can place orders through foreign brokers or via overseas trading platforms.

By the way, U.S. stocks don’t have limit up or limit down restrictions, but they do have circuit breakers. Simply put, if the price moves too violently, trading will be automatically paused to cool down. If the market drops more than 7%, trading pauses for 15 minutes; if it drops 20% in a day, the market closes for the day. Individual stocks also have circuit breakers—if their price moves more than 5% within a short period, trading is temporarily halted. So, rather than strict limits on price changes, these mechanisms are used to control market volatility through trading suspensions.

In summary, understanding what limit up and limit down mean, along with the underlying mechanisms, helps you make smarter decisions when facing these situations.