The truth about limit-ups and limit-downs: What is the percentage limit for stock limit-ups, and how can retail investors seize the opportunity?

What are Limit Up and Limit Down, and what is the percentage limit for stock price increase?

In the stock market, “Limit Up” and “Limit Down” are the most extreme and attention-grabbing phenomena in price fluctuations. Simply put, these two terms describe the upper and lower limits set by regulatory mechanisms that a stock price can reach within a trading day.

Taking Taiwan’s stock market as an example, the limit for stock price increase is how many percent? Regulatory rules state that the price fluctuation cannot exceed 10% of the previous trading day’s closing price. If TSMC closed at NT$600 yesterday, then today the highest price can only rise to NT$660 (limit up), and the lowest would fall to NT$540 (limit down). Once these prices are reached, the stock price will be “locked,” preventing further upward or downward movement.

How to determine if a stock has hit the limit up or limit down?

The most straightforward way is to look at the trading screen: if a stock’s price chart suddenly becomes a straight horizontal line, and the buy and sell orders show a clear imbalance, then this stock has likely hit the limit up or limit down. On Taiwan stock trading software, limit-up stocks are marked with a red background, and limit-down stocks with a green background, making it easy to identify at a glance.

A clearer view can be obtained from the order book. At limit up, buy orders pile up heavily, while sell orders are sparse — reflecting that there are far more buyers than sellers in the market. Conversely, at limit down, sell orders are overwhelming, and buy orders are scarce, indicating investors want to exit and are overwhelmed by those trying to buy cheaply.

Can trading still occur during limit up or limit down?

This is a common question among beginners. The answer is: Yes, trading is still allowed during limit up and limit down, but the difficulty of executing trades varies.

Trading during limit up: If you place a buy order to enter, sorry, you’ll need to queue. Because there are already many buyers waiting at the limit-up price, your order might have to wait a long time before a seller is willing to sell. But if you place a sell order, then it’s a different story — due to intense buying pressure, your sell order is usually instantly matched and executed.

Trading during limit down: The situation is reversed. Buyers will quickly execute their orders because there are many sellers wanting to unload. Conversely, if you want to sell at this time, you’ll need to queue until a willing buyer appears.

What drives stocks to hit the limit up?

Stocks hit the limit up usually due to several main factors.

Positive news triggers are the most common. When a company releases excellent financial data — such as quarterly revenue surging, EPS exceeding expectations — or announces major contracts, market funds rush in immediately. For example, TSMC hitting the limit up due to securing large orders from Apple or NVIDIA is a classic case. Favorable policy news also has explosive effects, such as government initiatives promoting green energy subsidies or electric vehicle support plans, which often cause related concept stocks to jump straight to the limit up.

The accumulation of thematic hype can also push stock prices higher. AI concept stocks surge to the limit due to booming server demand, biotech stocks are frequent targets of speculation. During quarter-end or year-end accounting periods, institutional investors and major players aggressively buy semiconductor and small-to-medium electronics stocks to boost performance, easily locking in the limit up with a little spark.

Technical breakthroughs are also significant. When stock prices break through long-term consolidation zones with high volume, or when high short interest triggers short squeeze rallies, these attract continuous buying pressure, ultimately locking the stock at the limit.

When major players lock in chips (shareholding positions), stock prices can also easily hit the limit up. Foreign institutional investors and investment trusts continuously buy in large amounts, or major players tightly lock the chips of small and medium stocks, leaving no shares available for sale in the market. Any slight push can hit the limit up, leaving retail investors unable to buy.

The real culprits behind limit down

In stark contrast to the glamorous limit up, limit down often signals misfortune.

Negative news shocks are the most direct cause. Disappointing earnings reports — such as losses widening or gross margin halving — can trigger panic. Corporate scandals, like financial fraud or executive misconduct, are equally deadly. Industry downturn signals, such as an entire sector entering recession, can cause market panic selling to instantly wipe out all support.

Systemic risks spreading can also lead to widespread limit downs. During the COVID-19 outbreak in 2020, many stocks directly hit the limit down. Black swan events in international markets also spread contagion; when the US stock market crashes, TSMC ADRs lead the decline, followed by Taiwanese tech stocks also hitting the limit down.

Major players dumping shares can catch retail investors off guard. They first pump up the stock to gather popularity, then sell at high prices to trap followers, a common tactic. Margin calls make it worse; the 2021 shipping stock crash is a typical example — as stock prices fall, margin calls are triggered, leading to a surge in selling pressure, leaving retail investors unable to escape.

Technical breakdowns are another warning sign. Falling below key support levels like the monthly or quarterly moving averages, or suddenly experiencing high volume black candles, are clear signals of major players offloading shares. Stop-loss selling can quickly cause a limit down.

Different approaches in global stock markets: Taiwan has limit up/down, US does not

Interestingly, different stock markets adopt entirely different risk control mechanisms. Taiwan has the limit up/down system, while the US does not.

The US risk control method is “circuit breakers” (automatic trading halts). When stock prices fluctuate beyond certain thresholds, the system automatically pauses trading for a period, allowing the market to cool down before resuming.

Specifically, US circuit breakers are divided into two levels:

Market-wide circuit breaker: If the S&P 500 drops more than 7%, trading halts for 15 minutes; if it drops more than 13%, another 15-minute halt; if it hits 20%, trading is suspended for the rest of the day.

Single stock circuit breaker: If a stock’s price moves more than 5% within 15 seconds, trading on that stock is halted. The duration of the halt varies depending on the stock type and trading session.

Both systems have their pros and cons: Taiwan’s limit up/down limits are clear and predictable for retail investors; US circuit breakers are more flexible but make it uncertain when trading will reopen.

What should retail investors do when encountering limit up or limit down?

Step 1: Rational analysis, don’t be driven by emotions

The most common mistake among beginners is blindly chasing gains or panicking and selling during declines. Seeing a limit up, they rush in; seeing a limit down, they panic and sell. Actually, you should first understand why the stock is hitting the limit.

If it hits the limit down but the company’s fundamentals are sound, and it’s just market sentiment or short-term factors dragging it down, it’s likely to rebound later. In such cases, holding or small-scale accumulation is smarter.

Similarly, when seeing a limit up, don’t rush to buy immediately. First, verify whether the positive news is genuine and sufficient to support further price increases. If in doubt, waiting is the best strategy.

Step 2: Shift focus to related or overseas-listed stocks

When a leading stock hits the limit up, it often indicates the entire industry chain will be affected. Instead of trying to buy at the limit-up price, consider purchasing related upstream or downstream companies or similar stocks. When TSMC hits the limit up, other semiconductor stocks usually follow, which can be a better entry point.

Additionally, some Taiwanese stocks are also listed in the US. TSMC(TSM) can be bought on US exchanges. If you want to invest, you can place orders through cross-border brokerages or overseas brokers, making trading more convenient and flexible.