What is a ceiling?
- In the financial world, a ceiling is the maximum allowable limit for any kind of price.
- The government, through the administrative bodies at the state and federal levels, ensures that ceilings are observed and in place.
- A ceiling is implemented for many reasons, but they’re mainly used to control prices and prevent abusive and unfair business practices.
When we talk about a ceiling in the financial world, we do not mean the roof that protects you from the sun, wind, and rain. For people involved in investing and accounting, the term ceiling implies a limit placed by the government or sometimes among companies.
Most of the time, the ceiling is related to price. However, a “supply” maximum can also be ordered by the government and even a “usage” maximum. A supply ceiling can be ordered if there is an excess stock of materials. For instance, the government can order a limit to the number of oil barrels purchased by the country from other nations. A “usage” limit can also be declared by the government. An example would be the use of plastic. A plastic usage ceiling allows for the purpose of plastic as a raw material for items and products, but not as a container (think plastic bags and bottles), as a way to address specific environmental laws and encourage more sustainable habits.
Investors and businesses observe price ceilings with great interest in comparison to supply and usage ceilings, due to their effects on profit margins.
Why should there be a ceiling for investors?
There are three primary reasons why the government sets a price limit.
- To protect consumers from unforeseen events that will raise the cost of daily necessities.
Whenever a hurricane or any major environmental disaster arrives and leaves a path of destruction in an area, the state can order businesses to put a cap on prices for necessities, like water and food. In times of need, some unscrupulous business owners may raise the prices to double or even triple the rate. People need to eat and drink to survive, and these dishonest entrepreneurs may try to take advantage of the situ.
- To ensure that there will be no unfair practices that may occur.
Some areas, like San Francisco and New York, have a price ceiling for rent. Landlords cannot raise the rents above the maximum, or they will be penalized by the law. Balancing between landlords getting a good return and ensuring lower rates of homelessness can be tricky but is a big necessity.
- To protect investors and debtors in the financial world.
Businesses need capital to function, and profitable companies can sometimes lose revenue due to lack of funds. Funds are vital in business operations like purchasing of raw materials or paying workers their salaries. Some banks and institutions may offer a loan, but due to the need of a business, these financers might ask for an absurd price or interest rate for the loan. The desperate corporation or individual may agree to the terms even if the interest rate is too large for their risk appetite.
A credit agency and other government bodies make sure that the interest rate remains fair for both the debtor and the creditor.
For investors, the price ceiling is less about a government restriction and more of a number to follow. This is why they also call it an all-time high. If the price of a share exceeds the all-time high, investors and traders celebrate since the value of their investments shows an increase in their assets, and there is a chance that the price of the stock may continue going up.
However, buying at or near a price ceiling or all-time high can be a risky strategy. Limits are in place to make sure that everyone is safe, and the earlier you appreciate the safety of price ceilings, the faster you can grow in financial maturity.