In the context of stocks, a price band is a range of prices within which a particular stock is allowed to trade during a single trading session. The price band is determined by the stock exchange or regulatory authority and is typically based on a percentage above or below the stock’s previous closing price.
Price bands are used to regulate the movement of stock prices and to prevent excessive volatility or manipulation in the market. When a stock reaches the upper or lower limit of its price band, a “circuit breaker” may be triggered, which halts trading temporarily to allow investors to reassess their positions and to prevent panic selling or buying.
Price bands may be used for different types of securities, but are most commonly used for stocks. The specific rules and parameters for price bands can vary between exchanges and regulatory authorities, and may be adjusted based on market conditions or other factors.
Let’s say that a stock is trading at a closing price of $100 per share on a particular day. The regulatory authority or exchange may set a price band for the stock of 10%, which means that the stock is allowed to trade within a range of $90 to $110 per share during the next trading session.
If the stock reaches the upper or lower limit of the price band during trading, a circuit breaker may be triggered, which temporarily halts trading in the stock. For example, if the stock’s price reaches $110 per share, which is the upper limit of the price band, the circuit breaker may be triggered, and trading may be halted for a period of time (e.g., 15 minutes) to allow investors to reassess their positions.
Price bands are used to prevent excessive volatility and to maintain stability in the market. They also help to prevent manipulation by limiting the ability of traders or investors to artificially inflate or deflate a stock’s price. Price bands are commonly used in many stock exchanges around the world, including the New York Stock Exchange (NYSE) and the National Stock Exchange of India (NSE).