Can you still buy stocks when they hit the limit down? Master the trading rules and risk management strategies

Stock price limit-down is one of the phenomena investors fear most, but many still don’t fully understand the trading rules during limit-down situations. In fact, a stock hitting the limit-down does not mean trading is completely impossible; the key is to understand the true market conditions at that moment. This article will explore the nature of limit-down, the buying and selling mechanisms, and how investors should respond to this extreme market behavior.

Limit-Down and Limit-Up: The Most Extreme Price Movements in the Stock Market

In the stock market, limit-up and limit-down represent the two extremes of price fluctuation. When the market experiences one-sided buying or selling pressure, these restrictions are triggered.

For example, in the Taiwan stock market, regulations stipulate that the daily price change of listed and OTC stocks cannot exceed 10% of the previous day’s closing price. If TSMC closed at NT$600 yesterday, today the stock price can only rise to NT$660 or fall to NT$540. Once the price hits this limit, it becomes “frozen,” which is called limit-up or limit-down.

Visually, you can quickly judge this on the trading interface. In Taiwan stock trading software, stocks at limit-up are usually marked with a red background, while limit-down stocks are marked with a green background. A more obvious indicator is that when a stock hits the limit-up or limit-down, the price chart becomes a straight line, with no movement—this is the most intuitive way to identify it.

Can You Buy Stocks at Limit-Down? Clarifying the Trading Rules

Many investors’ most common question is: When a stock hits the limit-down, can I still buy? The answer is yes. Limit-down does not prohibit trading; it only restricts the price fluctuation range.

When a stock hits the limit-down, if you place a buy order, it will generally be executed immediately because there are far more sellers than buyers at that moment. The selling pressure is very heavy, and buyers become scarce, so your buy order is likely to be filled quickly.

Conversely, if you place a sell order at limit-down, you may need to wait in line. Since the limit-down price level is already filled with pending sell orders, your order will be queued behind them and may take some time to execute. In this situation, unless there is continuous buying support, your sell order may not be filled quickly.

In summary: Buying at limit-down is easy to execute, but selling may require waiting. This is because market sentiment determines supply and demand.

What You Need to Know Before Trading at Limit-Down: Execution Mechanism and Risks

Understanding the execution mechanism during limit-down is crucial. Many retail investors suffer significant losses at limit-down because they do not understand this process.

When a stock hits the limit-down, you see buy orders hanging there, but these orders often do not execute immediately because sellers may demand a lower price or there may be no willing sellers at that price. However, at limit-down, the stock price is already restricted at the lowest point, and any investor willing to buy at the limit-down price is essentially “bottom-fishing.”

But beware of a trap: Limit-down often signals that worse negative news is about to be announced. The company might have earnings surprises, financial fraud, management scandals, or the entire industry could be entering a recession. In such cases, even if you manage to buy the stock at limit-down, the next day’s opening could be at the same limit-down price or even lower if new negative news emerges. This is why blindly trying to buy cheap during limit-down is very risky.

Negative news is usually the main cause of limit-down. Besides company-specific issues, market panic can also trigger limit-downs. For example, during the COVID-19 outbreak in 2020, many stocks directly hit the limit-down; or during a US stock market crash, Taiwanese tech stocks also fell to limit-down. Under systemic risk, limit-downs are often not due to individual stock problems but reflect overall market panic.

The US Market Has No Limit-Down, Instead Using Circuit Breakers to Control Volatility

The US stock market’s rules are quite different from Taiwan’s. The US does not have limit-down restrictions, but it employs “circuit breakers” to prevent market crashes and systemic risks.

The circuit breaker mechanism works simply: when stock prices fluctuate beyond a safe zone, trading is automatically halted to allow the market to cool down. US circuit breakers are divided into two types.

Market-wide circuit breakers apply to the entire market. When the S&P 500 drops more than 7% within a short period, trading pauses for 15 minutes; if it drops 13%, another 15-minute halt; if it hits a 20% decline, trading is halted for the rest of the day. This design aims to prevent panic selling from triggering a chain reaction.

Single-stock circuit breakers target individual stocks. If a stock’s price surges or drops more than 5% within 15 seconds, trading for that stock is temporarily suspended. Different stocks have different thresholds and suspension durations.

From an investor protection perspective, Taiwan’s 10% daily price limit and the US’s circuit breakers each have advantages and disadvantages. Taiwan’s stricter limits can quickly cool market sentiment, while US circuit breakers offer more flexibility but give investors less time to react.

Main Reasons Behind Limit-Down Occurrences

To decide whether to buy at limit-down, you first need to understand why limit-downs happen.

Negative news is the most direct cause. Earnings misses (wider losses, declining gross margins), scandals (financial fraud, management involvement), or industry downturns can trigger panic selling. When the market sees such news, almost all investors react by selling, pushing the stock down to the limit.

Market panic sentiment also plays a role. The collapse of shipping stocks in 2021 is a typical example. Many retail investors, leveraged through margin, were forced to cut positions, creating a wave of selling that triggered limit-downs. In such cases, the fundamentals may not be the main issue; it’s more about liquidity and emotional reactions.

Technical breakdowns can also cause chain reactions. When a stock breaks below key support levels like the monthly or quarterly moving averages, stop-loss orders trigger, and if large players start unloading, it can lead to heavy volume black candles and rapid limit-downs.

How Investors Should Rationally Respond to Limit-Downs

The most common mistake when facing a limit-down is blindly chasing the fall or blindly bottom-fishing. Beginners often see a stock at limit-down and want to “buy the dip,” hoping for a rebound; or they sell immediately to cut losses, fearing further decline. Both extremes are dangerous.

First step: analyze the root cause of the limit-down. Why did the stock fall? Is it due to company-specific problems or market sentiment? If it’s the former, the stock may continue to decline, and the limit-down is just the beginning; if it’s the latter, it might rebound once sentiment stabilizes.

Key to this judgment is assessing the severity and persistence of negative news. Major scandals like accounting fraud tend to cause prolonged declines, while temporary industry news may only cause short-term shocks.

Second step: evaluate your investment goals and time horizon. If you are a short-term trader, a limit-down stock has little trading value because the price is frozen. If you are a long-term investor and believe in the company’s fundamentals, you might consider gradually building a position during the decline.

Third step: consider alternative strategies. When a major stock hits limit-down, you can look at related upstream or downstream companies or similar stocks. For example, if TSMC hits limit-down, other semiconductor stocks might also decline but not hit the limit, potentially offering better entry points.

Additionally, many Taiwanese companies are also listed on US exchanges. TSMC, for instance, has the ticker TSM. You can trade through foreign brokers or via cross-border trading, sometimes with more rational pricing than in Taiwan, providing another reference.

A limit-down is not the end of investing; it’s a test of an investor’s rationality and discipline. True winners are not those who gamble during the chaos but those who see through the confusion and make correct decisions.