What are price limits?
As the name suggests, price limits represent the maximum level by which a security can rise or fall during a trading session. Price limits are set by the securities exchange in question.
Where have you heard about price limits?
As an investor, you may well have been made aware of price limits by your financial adviser and by reading the financial media. Securities exchanges on which you trade may have made you aware of their specific price limits. Investment guides are likely to refer to them.
What you need to know about price limits.
Price limits are calculated in relation to the previous session's closing price for the security in question, whether a share, future, option or commodity. They mark the high and low point above or below which each security will not be allowed to move during the current trading session. When these limits are reached, trading is suspended for the day. They were introduced after "Black Monday", the 1987 stock-market panic during which the price of options and of the shares underlying them chased each other downwards. Supporters say price limits provide a cooling-off period during which a herd mentality can dissipate. Critics say they merely store up buying or selling demand and distort prices.
Find out more about price limits.
Price limits are a key feature of investment exchanges. Learn more about investment exchanges here.