How it works
Based on the previous day's closing price, an upper and lower price range is set in advance according to the stock's price level. A stock whose price reaches the upper bound is said to hit "limit up," and one that reaches the lower bound is said to hit "limit down" (see the respective pages for details).
Purpose
The daily price limit exists to curb extreme short-term swings in a stock's price — for example, in a stock that has just released major news — and to help prevent investors from being forced to trade at excessively unfavorable prices.