Understanding the Floor Price and Ceiling Price in the Vietnamese Stock Market – Formulas and Practical Applications

Floor Price, Ceiling Price: Two Key Price Boundaries on the Trading Floor

In the Vietnamese stock trading platform, the concepts of floor price and ceiling price play a crucial role in market regulation. These limits are set by the State Securities Commission to protect the market from extreme price fluctuations within a trading session.

Floor price is the lowest price at which a security can be traded, while the ceiling price is the highest. For each new trading session, these limits are recalculated based on the previous session’s closing price, called the reference price(. On electronic price boards, floor price is usually displayed in light blue, while the ceiling price is shown in purple.

A specific example: KDH stock has a floor price of 35,700 VND and a ceiling price of 41,000 VND in a certain trading session.

Benefits and Limitations of the Price Floor – Price Ceiling Mechanism

) Benefits

This mechanism offers several important advantages for the market:

Controlling extreme volatility: The floor and ceiling prices act like safety brakes, preventing traders from pushing prices too high or too low within a session. This protects investors from unnecessary losses due to market manipulation.

Minimizing loss risks: The floor price helps traders limit maximum losses in a session when the market is highly volatile.

Price manipulation prevention: Those attempting to manipulate prices by buying up or selling off will face clear barriers, helping to maintain fairness in the market.

Limitations

However, this mechanism also has notable drawbacks:

Liquidity congestion: When buy orders exceed sell orders or vice versa, prices can quickly hit the floor price or ceiling price, creating long waiting times without counterparty orders. At this point, liquidity almost completely halts.

Trading opportunity loss: A trader wanting to buy a stock but it has already hit the floor price early in the session, or wanting to sell but it has hit the ceiling price, will have to wait until the next session for trading opportunities.

Profit limit: Traders cannot realize profits beyond the range set by the ceiling price, which limits potential gains during active market sessions.

Panic selling effect: If many stocks are “stuck” at the floor price simultaneously, especially large-cap stocks, it can create a negative psychological effect, exerting selling pressure across the entire market.

Calculation Formulas for Floor Price and Ceiling Price

The calculation methods for floor price and ceiling price vary depending on the product type and exchange. In international or US derivatives markets, these limits are not applied, but in Vietnam, both the underlying and derivatives markets have these regulations.

For Stocks, VN30, Futures Contracts

The formulas used on HOSE, HNX, and UPCOM are:

Ceiling Price = Reference Price × ###1 + Price Fluctuation Margin %(

Floor Price = Reference Price × )1 – Price Fluctuation Margin %(

where the reference price is the previous session’s closing price. The fluctuation margin varies by exchange: HOSE is 7%, HNX is 10%, and UPCOM is 15%.

Real-world example: HPG stock has a reference price of 24,000 VND/share on 10/08/2022, traded on HOSE with a 7% margin:

=> Ceiling Price = 24,000 × )1 + 7%( = 25,680 VND

=> Floor Price = 24,000 × )1 – 7%( = 22,320 VND

) For Warrants

The formulas are more complex:

Ceiling Price = Warrant reference price + ###Ceiling price of underlying stock – Underlying stock reference price( × )1/Conversion rate(

Floor Price = Warrant reference price – )Underlying stock reference price – Underlying stock floor price( × )1/Conversion rate(

If the calculated floor price is less than or equal to 0, the floor price is set at the minimum quote of 10 VND.

Example: CFPT2205 warrant has a reference price of 1,240 VND/CW, conversion rate 6:1, FPT stock has a ceiling price of 92,234 VND, floor price of 80,166 VND, and reference price of 86,200 VND:

=> Ceiling Price = 1,240 + )92,234 – 86,200( × )1/6( = 2,245 VND

=> Floor Price = 1,240 – )86,200 – 80,166( × )1/6( = 234 VND

Trading Strategies Based on Floor Price and Ceiling Price

Skilled traders can leverage the floor price – ceiling price mechanism to optimize their trading decisions.

When the price hits the ceiling with high buy order volume: This indicates strong demand. If a trader owns this stock and is in profit, they might hold for the next session expecting higher gains, or partially sell to protect profits.

When the price hits the ceiling but selling pressure remains strong: This signals that selling pressure is competing with buying demand. Traders should consider taking profits if targets are met, or selling part of their holdings to monitor further developments.

When stocks are stuck at the floor with low liquidity: Especially during bad news or market volatility, traders should prepare to sell to avoid deeper losses.

Key point: The Vietnamese stock market operates on a T+1.5) settlement cycle, meaning immediate intra-session trading is not possible. Traders need to analyze trends carefully when prices hit floor price or ceiling price to avoid FOMO( (fear of missing out) or getting stuck selling at the floor while demand still exists.

Frequently Asked Questions

How are the floor price and ceiling price different from the highest and lowest prices in a session?

The floor and ceiling prices are calculated beforehand based on the reference price, whereas the highest and lowest prices are results of actual supply and demand during the session. The actual high or low may never reach the floor price or ceiling price.

Does the Vietnamese derivatives market have regulations on price floors?

Yes. The Vietnamese derivatives market applies floor prices and ceiling prices, but most international derivatives markets do not have such regulations.

Are cryptocurrencies subject to price floor limits?

No. The cryptocurrency market is completely free, with no limits on price fluctuations.

Which markets do not have regulations on price floors or ceilings?

International derivatives markets, CFD contracts, forex, commodities, and cryptocurrencies do not regulate price floors or ceilings. These regulations depend on the policies of each national securities commission.

Mastering the floor price and ceiling price mechanisms not only helps traders better understand the stock market but also is key to developing effective trading strategies and better risk management.