(Trading Band) Price Floor and Price Ceiling in the PSE

September 10, 2009

Stocks, Mutual Funds, Forex, Finance Philippines

Make Money Online, Stocks, Mutual Funds, Philippines

The Philippine Stock Exchange (PSE) recently approved the exemption of certain securities in the so-called price trading band.

With this limit lifted, certain securities can rise more than 50% in value or decline more than 40% within one trading day.

What are PRICE TRADING BANDS?

A trading band is a limit on the price fluctuation of a security. It intends to provide investors protection in case prices change drastically, especially if there is no relevant information that should cause dramatic price fluctuations.

In the Philippines, what is the price trading band?

The Philippine Stock Exchange limits stock prices from rising more than 50% in value (Price Ceiling) and from declining more than 40% in value (Price Floor) from the previous closing price.

Example of how this works:

Let’s assume that the stock of Philippine Long Distance Telephone Company or PLDT (Stock Code: TEL) closed yesterday at P2,415.00. Today, TEL’s price can only increase up to 50% and can decrease up to 40%.

Specifically, TEL’s ceiling price today is P3,622.50 (up 50%) and the floor price is P1,449.00 (down 40%).

How does the Board Lot affect Price Floor and Price Ceiling?

However, the ceiling and floor prices are still governed by the PSE Board Lot Table, which identifies the minimum increments a price can fluctuate. According to the Board Lot Table, a stock priced above P505.00 must fluctuate by a minimum of P5.00.

Thus TEL’s ceiling price of P3,622.50 must be rounded down to the nearest P5.00 to become a “valid” stock price. The actual ceiling price of TEL then is P3,620.00.

Why round down to P3,620.00 and not round up to P3,625.00? If TEL’s price is P3,625.00, this is already an increase of 50.10% from the previous P2,415 closing price — a violation of the 50% price increase limit set by the PSE.

Similarly, TEL’s floor price must be rounded up to P1,450. If it was rounded down to P1,445.00, the price decrease is 40.17%, a violation of the maximum 40% price decrease limit of the PSE.

Other references:

Note: This is the sixth of several parts of Pinoy Money Talk’s primer on stock trading and investing, with a focus on investing in the Philippine stock market.