What is the minimum price?

Definition of the Price Limit Down

“Price limit down” refers to the maximum drop that the price of a futures contract or a stock can decrease in a single trading day.

Definition and Example of Price Limit Down

The term price limit down refers to the maximum decline that the price of a futures contract or stock can experience in a single trading day. On the other hand, the term “price limit up” is the maximum increase that the price of a futures contract can experience within that daily time frame.

Both terms stem from the rule of price limit up – price limit down, a market rule established by the U.S. Securities and Exchange Commission (SEC) to counter high levels of market volatility. Conversely, price limits act oppositely to the down limits by capping the amount the price of the commodity or stock can rise.

How Price Limit Down Works

Price limit down, as well as the entire price limit up – down rule, applies to any stock in the National Market System (NMS), which includes the majority of exchange-listed stocks. This can include both non-convertible stocks and convertible preferred stocks.

Price limits for a stock are based on a specific percentage above and below the average price of the stock over the previous five-minute trading period. The upper and lower limits actively prevent trading in NMS securities from occurring outside the previously mentioned price limits. Generally, the limit is determined as a percentage of the market price of the securities in question.

Let’s explain how this process works. If a stock’s price hits the price limit but does not return to the original price limit within 15 seconds, trading in that stock will pause for five minutes. Since implementing this process in 2011 (after a severe market volatility event in May 2010), the SEC has made various regulatory changes to ensure that trades do not occur outside the price limits and to respect any trading halts. The current pauses make it easier to adjust to fundamental price movements, according to the SEC.

Typically, the percentages used for price limits are 5%, 10%, 20%, or any percentage lower than between 15 cents and 75%. The way the percentage is chosen depends on the stock’s price, the timing of the change, and the classification that the stock follows.

The S&P 500 index and the Russell 1000, along with exchange-traded products, are classified as NMS Tier 1 stocks. At the same time, NMS securities, excluding rights and warrants, are classified as NMS Tier 2 stocks.

Sources

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Investors.gov. “Stock Market Circuit Breakers.” Accessed December 3, 2021.

U.S. Securities and Exchange Commission. “SEC Announces Filing of Limit Up-Limit Down Proposal To Address Extraordinary Market Volatility.” Accessed December 3, 2021.

Source: https://www.thebalancemoney.com/what-is-a-limit-down-5211819