Define Daily Price Limit:

"The term "daily price limit" refers to the maximum allowable price movement permitted for a financial instrument, such as a stock, commodity, or futures contract, within a single trading day."

Explain Daily Price Limit:

What is Daily Price Limit?

It sets a boundary or restriction on how much the price of the instrument can increase or decrease during a given trading session.

Here are a few key points to understand about the concept of daily price limits:

1. Purpose: Daily price limits are implemented to promote market stability, prevent excessive price volatility, and provide a level of protection for market participants. They are put in place by regulatory bodies or exchanges to ensure orderly trading and mitigate the risks associated with extreme price movements.
   
   
2. Upward and Downward Limits: Daily price limits typically have both upward and downward limits. The limits are often expressed as a percentage or a fixed price amount relative to the previous day's closing price.
   
   
3. Application: When the price of an instrument reaches the daily price limit, it triggers a temporary halt or suspension of trading for that instrument. Trading is halted to allow market participants time to assess new information, digest market developments, and determine the appropriate course of action.
   
   
4. Market Reaction: Once a trading halt is lifted, the instrument's price can continue trading within the daily price limit range. If the price reaches the limit again, it may trigger additional trading halts, depending on the rules and regulations of the specific market.
   
   
5. Exceptions and Circuit Breakers: In certain cases, such as during periods of extreme market volatility or news events, daily price limits may be expanded or overridden temporarily. Circuit breakers, which are additional market safeguards, may come into effect to halt trading if predetermined thresholds are breached.

It's important to note that the specific rules and regulations regarding daily price limits can vary across different markets, exchanges, and instruments. Traders and investors need to be aware of the applicable daily price limits for the specific instruments they trade to manage their positions effectively and understand the potential impact of price restrictions on their trading strategies.

Example of Daily Price Limit

Here's an example of a daily price limit using hypothetical numbers for a stock:

Let's consider a stock with a daily price limit of ±10% of the previous day's closing price.

1. Previous Day's Closing Price: $100.00

Based on the daily price limit of ±10%, the price movement of the stock would be limited as follows:

• Upper Limit (10% above the previous day's closing price): $100.00 + ($100.00 * 10%) = $110.00
• Lower Limit (10% below the previous day's closing price): $100.00 - ($100.00 * 10%) = $90.00

So, for the current trading day, the price of the stock can move within the range of $90.00 to $110.00. If the price reaches either the upper or lower limit, it may trigger a temporary halt or suspension of trading for that stock.

It's important to note that the daily price limit and its percentage or price amount can vary depending on the specific exchange, market, or instrument.

The example above is for illustrative purposes only and does not reflect the actual daily price limit for any particular stock. The actual daily price limits are determined and imposed by the relevant regulatory bodies or exchanges.