In the stock market, a circuit breaker is a regulatory mechanism designed to temporarily halt trading when there is excessive volatility, either due to sharp price rises (upper circuit) or falls (lower circuit). These circuits prevent extreme fluctuations in stock or index prices within a single trading session. The upper circuit limits how much a stock can rise, while the lower circuit restricts how much it can fall. This system helps stabilize the market and allows investors time to assess the situation before making decisions.
How Do Circuits Work?
Stock exchanges like the BSE and NSE in India define specific percentage limits for both stocks and indices. If a stock’s price moves beyond the set percentage, trading is halted to prevent panic buying or selling. For individual stocks, circuit limits can range from 2% to 20% per day, while for broader market indices like the Sensex or Nifty, market-wide circuit breakers are triggered if there is a 10%, 15%, or 20% movement.
For example, if a stock has a 10% circuit limit, and its previous closing price was ₹100, then its trading would be halted if the price drops below ₹90 (lower circuit) or rises above ₹110 (upper circuit). The length of the trading halt depends on the magnitude of the price change, providing investors time to evaluate market conditions.
Why Circuits Matter for Investors
- Prevents Panic: Circuit breakers give the market time to cool down, preventing knee-jerk reactions from investors during periods of extreme volatility.
- Market Stability: By limiting how much a stock or index can move in a day, circuits help maintain orderly trading and protect retail investors from massive losses.
- Protects Against Manipulation: Circuits safeguard against potential manipulation or speculative trading that can cause erratic price movements
FAQ
- What is a circuit in the stock market?
A circuit is a limit set on how much a stock or index can rise or fall during a trading session. It helps control market volatility. - What happens when a stock hits the upper circuit?
Trading for that stock is paused because it has reached its maximum allowable price increase for the day. - How does the lower circuit protect investors?
The lower circuit prevents a stock from falling beyond a certain limit, helping protect investors from massive losses in a single session. - Can the entire market be halted?
Yes, if a major index like the Nifty or Sensex moves by 10%, 15%, or 20%, market-wide circuits are triggered, and trading halts for a specified duration. - Do all stocks have the same circuit limits?
No, circuit limits vary depending on the stock’s category and volatility, ranging from 2% to 20%.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always perform thorough research or consult a financial professional before making investment decisions.