Futures contracts are like that old broken-down car you used to put-put around in during high school: it will only go so far on a given trip. If your car traveled more than 20 miles in one go, the engine would sputter out and you'd have to push it into the nearest parking lot.
For a futures contract, there are price limits imposed by the exchange. The price can only move so far on a single day. If it reaches its limit, trading halts come into effect and prices aren't allowed to move further until the next day. Imposing limits keeps volatility under control; prices can only move so far, so fast. However, it also complicates the basic function of a market: to discover the appropriate price for something.
The variable price limit helps make that price discovery aspect go more smoothly. A futures contract reaches its price limit on a day. The next day, the price limit gets changed to the variable price limit. It provides a wider trading band for the contract, allowing it to move further than it did on the previous day.
So...say a futures contract has a price limit of $2 and a variable price limit of $4. On Monday, the contract rises from $10 to $12, triggering the price limit. On Tuesday, the limit widens to the variable amount...$4. Now the contract can rise to $16 or fall to $8 before the limit gets reached.
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Finance: What are Limit Order, Sell Limi...4 Views
Finance a la shmoop what is a limit order? you want to sell a thousand shares
of Colonel electric it was demoted after they cut their dividend the shares have [Scissors cuts dividend in half]
been trading wildly between $15 and $25 a share you don't want to feel like a
moron for having sold them at fifteen bucks when six weeks later they kissed
25 with tongue so what do you do well you put in a limit order that is you put
a limit of a minimum price of 25 bucks a share for Colonel Electric such that [Pile of stocks appear]
those shares will simply sit in your account unsold maybe forever until
somebody out in the wild blue yonder of Stockland is willing to pay twenty five [Woman standing at a colonel electric stand]
dollars or more for the shares where you have a minimum price limit of 25 bucks a
share in your order so here's to hoping they sell and don't get further demoted [Man carries stock into car]
Sargent Electric is just a place you don't want to go
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