What does stock price limit mean?

Stock price limit refers to the maximum or minimum price at which a stock is allowed to trade in a single trading session. These limits are imposed by stock exchanges to prevent extreme volatility in the price of a stock. The limit is typically a percentage above or below the stock's previous day's closing price. A stock's price limit is designed to prevent sudden and drastic movements in the stock price, which can be detrimental to the stability of the market and can cause panic among investors. It provides a safety mechanism to ensure that the stock price remains within a reasonable range and does not deviate too far from its fundamental value. When a stock reaches its price limit, trading in that stock is temporarily halted, and the stock is said to be "locked limit." This means that no trades can be executed at a price beyond the established limit. Once the price limit is reached, trading is typically halted for a brief period to allow investors to assess the situation and prevent panic selling or buying. Price limits are important for maintaining market stability and preventing excessive speculation. They ensure that stock prices reflect the true value of the underlying company and are not driven by sudden and irrational market movements. By setting limits on price movements, stock exchanges can help maintain orderly and fair trading conditions for all market participants.