Limit Down

DEFINITION of 'Limit Down'

The maximum amount by which the price of a commodity futures contract may decline in one trading day. Limit down also refers to the maximum decline permitted in individual stocks on certain exchanges before trading curbs kick in. The limit is generally set as a percentage of the market price of the futures or stock, and occasionally as a dollar amount. These limits were introduced to counter unusual market volatility and prevent panic-driven selling.

BREAKING DOWN 'Limit Down'

Some futures markets close trading of contracts when the limit down is reached; others allow trading to resume if the price moves away from the day's limit. If there is a major event affecting the market's sentiment toward a particular commodity, it may take several trading days before the contract price fully reflects this change. On each trading day, the trading limit may be reached before the market's equilibrium contract price is met.

In June 2012, the Securities Exchange Commission approved two proposals put forward by the national securities exchanges and FINRA to counter unprecedented volatility in individual stocks and the U.S. stock market. One proposal aims to establish a "limit up-limit down" mechanism that will "prevent trades in individual stocks from occurring outside of a specified price band, which will be set at a certain percentage above and below the average price of the security over the immediately preceding five-minute period." For example, the percentage level for liquid stocks, such as those in the S&P 500, will be 5%, and 10% for other listed securities. These proposals are expected to be implemented by February 4, 2013.

RELATED TERMS
  1. Limit Up

    The maximum amount by which the price of a commodity futures ...
  2. Daily Trading Limit

    The maximum gain or loss on a derivative contract, such as options ...
  3. Variable Price Limit

    A schedule of price variations above or below the accepted limits ...
  4. Lock Limit

    Commonly associated with the futures market, a lock limit occurs ...
  5. At Limit

    An order that sets a maximum limit on the buy price and/or a ...
  6. Position Limit

    The highest number of options or futures contracts an investor ...
Related Articles
  1. Trading

    Advantages Of Trading Futures Over Stocks (APPL)

    We look at the top eight advantages of trading futures over stocks.
  2. ETFs & Mutual Funds

    Introduction To Currency Futures

    The forex market is not the only way for investors and traders to participate in foreign exchange.
  3. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  4. Investing

    Options on Futures

    Options on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
  5. Trading

    Curious About Stock Index Futures? Read This First

    You've mastered investing in individual stocks...now what? If you like a challenge, consider stock index futures. Just be careful.
  6. Trading

    An Introduction To Trading Forex Futures

    We explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
  7. Trading

    Beginner's Guide To Trading Futures: The Basic Structure of the Futures Market

    In this opening section, we will take a look at how the futures market works, how it differs from other markets and how the use of leverage impacts your investing. How Futures WorkYou are probably ...
  8. Markets

    Trading Over the Counter

    OTC trades tend to be for smaller company stocks and debt securities. Debt securities such as bonds are generally traded by investment banks making markets for specific issues.
  9. Trading

    Forex Tutorial: What is Forex Trading?

    What Is Forex?The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies ...
  10. Trading

    Market Strength: Conclusion

    The usefulness of these indicators depends on what type of investor you are. Long-term investors shouldn't care too much if the S&P futures are up or down before the markets open, whereas traders ...
RELATED FAQS
  1. How do I set a strike price for a future?

    Find out why futures contracts don't have set strike prices like options or other derivatives, even though price change limits ... Read Answer >>
  2. How can I calculate the notional value of a futures contract?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>
  3. What types of items can you buy futures for?

    Learn what items futures may be purchased for, what a futures contract is and discover how the futures markets have greatly ... Read Answer >>
  4. What types of futures contracts are typically sold on an exchange?

    Explore the wide variety of available futures contracts traded on exchanges, which range from agricultural commodities to ... Read Answer >>
  5. What kinds of derivatives are traded on an exchange?

    Learn about the different types of derivatives traded on exchanges, including options and futures contracts, and discover ... Read Answer >>
  6. How do the investment risks differ between options and futures?

    Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center