Suspension of trading: All your questions answered

Suspension of trading, as the name suggests, means that an exchange has temporarily halted trading in a particular stock or other security.

June 19, 2021 / 07:59 AM IST

The BSE and the National Stock Exchange of India (NSE) recently suspended the trading in equity shares of Dewan Housing Finance Corporation (DHFL), which has ensued panic and commotion among stockholders.

To clear the cobwebs, let us understand what happens when an exchange suspends/halts the trading of stocks of a company and how it affects the stockholders.

Suspension of trading, as the name suggests, means that an exchange has temporarily halted trading in a particular stock or other security.

Trading could be halted for several reasons

a) Some crucial information is to be released about the company issuing stocks. In such a case, the company in question generally informs the exchange regarding the upcoming news. By suspending the trading of the stocks of that company, the exchange provides time for the market to soak up the announcement – whether it's desirable or undesirable – and helps prevent the stock prices from becoming excessively volatile. A poor earnings report, a major innovation or discovery, a merger or acquisition are the types of news that may warrant suspension of trading.

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b) Involvement in misleading or unlawful activities.

c) Non-compliance with the crucial clauses of the Listing Agreement.

How does it affect investors?

When an exchange announces a trading suspension, the company in question is no longer allowed to trade stocks in that exchange for a certain time which depends on the reason for the suspension. It means that neither brokers nor investors are allowed to deal in such stocks as long as the suspension remains active. In such a case, different types of investors are affected differently.

According to a study conducted by Recep Bildik, "Trading Halts and the Advantage of Institutional Investors: Evidence from the Istanbul Stock Exchange", institutional investors are placed better to take the price advantage of new information that is being disseminated in the market during the suspension period. Consequently, institutional investors can systematically buy and sell stocks at more favourable prices after the suspension is lifted as compared to retail investors.

On some rare occasions, a sudden drop in the stock prices has also been observed after the lifting of the suspension.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Rachit Chawla is the CEO & Founder of Finway FSC. Chawla is a registered financial advisor with SEBI.
first published: Jun 19, 2021 07:59 am

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