Limit Down

AAA

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.

INVESTOPEDIA EXPLAINS '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. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  2. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  3. Futures

    A financial contract obligating the buyer to purchase an asset ...
  4. Lock Limit

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

    A security whose price is dependent upon or derived from one ...
  6. Limit Up

    The maximum amount by which the price of a commodity futures ...
Related Articles
  1. An Overview Of Commodities Trading
    Options & Futures

    An Overview Of Commodities Trading

  2. An Introduction To Managed Futures
    Options & Futures

    An Introduction To Managed Futures

  3. Commodity Funds 101
    Mutual Funds & ETFs

    Commodity Funds 101

  4. Get Into Low-Cost Futures Trading With ...
    Options & Futures

    Get Into Low-Cost Futures Trading With ...

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center