LULD. Or more commonly known as Limit Up and Limit Down.
It has been quite sometime when these 2 words appear on a daily basis in the business news.
But for those who are not aware of the meaning, let’s touch on the basics first.
What is Limit Up & Limit Down?
Since the meanings for a limit up and limit down may differ across different products and countries, let’s start off with the scope. If you are investing in stocks in Malaysia, there will be limit up and limit down mechanism.
Limit Up is the maximum price cap that a stock can hit during an intraday session (within the same day).
Limit Down, on the other hand, is the minimum price cap that a stock can tank during an intraday session.
Of course, the mechanisms of each country’s trading differ from each other. The Singapore Exchange utilizes a Circuit Breaker. And the maximum and minimum price cap % is also different as well.
So is Limit Up a good thing, and Limit Down a bad thing?
Based on a layman point of view, most people would perceive Limit up with a long position as a good thing. Limit down with a long position is a terrible situation.
But is that the case?
Limit up and limit down mechanisms are set in place to prevent excessive irrational price movements.
The price caps are put in place to protect retail investors from the excessive price volatility of the market.
This is to ensure, that in the event of a trigger, retail investors have enough time to either sell of their positions at a maximum 30% loss per day or take profit.
The Mechanism of LULD is great, but the Occurrences not so
Limit up news headlines stoke the “fear of missing out” feeling among investors. Every now and then people getting sudden windfalls from the volatile but favourable price movements creates a fake perception on investing. That investing is all about picking stocks that have the highest potential on triggering a limit up. And not about finding value and growth companies.
The frequent occurrences of limit up and down just prove one thing: the market is as volatile as ever. Short term price movements can get as ludicrous and crazy. But to get a limit up 10 out of 10 times would require all the luck in the world. That also is if the price does not suddenly turn into a falling knife, opening up a lacerating limit down wound.
Erratic and sharp price movements show that the market is certainly in a volatile phase. And with macroeconomic numbers around the world still looking gloomy, it is perhaps much better to resist the urge to jump in the bandwagon for the next limit up stock.
Because it only takes a few limit downs to exhaust your hard-earned money in this wild world of the Malaysia stock exchange.
Share Price Movements & The Rationale
Share price movements tag along with a company’s growth or decline. There are of course periods of time when the share prices move in anticipation of either positive or negative news. But in the long run, a share price and the publics’ appetite and valuation of a share don’t run very far.
Taking a leaf from the legendary Benjamin Graham, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
We can only truly ascertain a company’s value through time. Short term news and price movements do not contribute to a company’s prospects, but rather for punters to take advantage.
Of course, resisting the FOMO and limit up euphoria is not easy. But it’s either you accept the fact that it is impossible to be consistently always right in picking a limit up stock. Or, you can try and learn it out the hard way.