Limit down is a stipulation in the trading of stocks, futures contracts, and other securities and is used to limit losses during a volatile market. It is an automated rule that halts trading when a security’s price falls by a predetermined amount.

When limit down is triggered, the security’s price is frozen for a defined period of time; the length of the suspension depends on the exchange and the asset being traded. Limit down enables buyers and sellers of a security to take a breather and evaluate the market before accepting or making offers at the frozen price. This can prevent an extended period of panic selling, which in turn can cause the security’s price to plunge even further.

The Limit Up-Limit Down rule is a mechanism designed to halt the trading of an individual security once its price drops or rises by a predetermined amount. It is similar to the circuit breaker system that is implemented in the broader market. When the S&P 500 index falls by a predetermined amount, trading is halted across the entire market, while smaller movements in individual stocks are managed by the Limit Up-Limit Down rule.

In essence, limit down is a safety mechanism put in place to prevent uncontrolled market movements and give investors a better chance of making informed and sensible decisions based on all the available information. By reducing the chances of panic selling, limit down helps preserve the integrity of the markets, allowing participants to focus on making the most informed decisions about their investments.