What are Price Trading Bands in stock trading?
A “trading band” is a limit on the price fluctuation of a stock or security. This means there is a price control imposed on a stock with regard to how much its price can rise or fall on a given trading day. This price limit is intended to provide protection to investors in case prices change drastically — especially if there is no relevant information that should cause dramatic stock price fluctuations.
Trading bands come in two forms: Price Ceiling, or the upper price limit, and Price Floor, or the lower price limit.
Price Ceiling and Price Floor in the PSE
In the Philippine Stock Exchange (PSE), fifty percent (50%) is the Price Ceiling and the Price Floor.
This simply means a stock’s price, compared to its previous closing price, is limited from rising more than 50% (Ceiling Price) and from declining more than 50% (Floor Price) during a given trading day.
What happens when the ceiling price or floor price is hit? Trading continues, but the price can no longer increase beyond the Ceiling Price or fall below the Floor Price.
Example: Price Ceiling and Price Floor
Let’s see an application of the Price Ceiling and Price Floor in the PSE.
Let’s assume that the stock price of PLDT – Philippine Long Distance Telephone Company (Stock Code: TEL) during the last trading day was P1,415.00. In the next trading day, TEL’s price can only increase or decrease by up to 50%.
Specifically, during today’s trading day:
- TEL’s Ceiling Price: P2,122.50 (up 50%)
- TEL’s Floor Price: P707.50 (down 50%)
This means during today’s trading, TEL’s stock price can rise only up to P2,122.50 and can fall only up to P707.50. But take note, the actual ceiling and floor prices which we will see in our online stock trading accounts may be slightly different since prices are still affected by the PSE Board Lot table.
PSE Board Lot and Price Floor and Price Ceiling
How does the PSE Board Lot table impact the price floor and price ceiling rule in the PSE?
The Board Lot table identifies the minimum increments a stock price can fluctuate. In the case of our PLDT example, according to the PSE Board Lot table, a stock whose price is trading between P1,000 and P1,999 can fluctuate by a minimum of P1.00.
Thus TEL’s ceiling price of P2,122.50 must be rounded down to the nearest P1.00 to become a “valid” stock price. The actual ceiling price, then, of TEL which we will see in stock trading platforms is P2,122.00.
Why round down to P2,122.00 and not round up to P2,123.00?
If TEL’s price is P2,123.00, this price is already an increase of 50.04% from the previous P1,415.00 closing price — a violation of the 50% ceiling price limit of the PSE.
Similarly, TEL’s actual floor price must be rounded up from P707.50 to P708.00, not rounded down to P707.00. At P707.00, this price represents a decrease of 50.04%, a violation of the maximum 50% floor price limit of the PSE.