Circuit breaker is a measure that is used in stock market during large sell-offs to avoid a panic selling situation. It is also called as ‘collar’ by few people. It is an integral part of stock market scenario. Few believe that circuit breaker is a system to sustain a fair degree of sanity of the stock market. There are certain factors which influence the prices of stock market within which few are predictable and few are not. Unpredictable factors can sometimes beat all logic and more the stock prices in any direction and that is when circuit breaker comes into picture.
Circuit breaker and stock market
When stock prices move beyond a certain range and that too erratically, it is considered as to enter into a circuit and that is when circuit breakers are applied. Circuit breakers can only be applied on equity and equity derivative markets. When major stock indices on BSE or NIFTY cross a threshold level, SEMI norms direct that trading be stopped for a specified period on that day. The time of stopping the time may depend on the amount of movement in the indices. This is done to cool down the market and resume trading a normal level.
Upper Circuit and Lower Circuit
As we all know, stock prices may move either up or down and therefore, circuit breakers are required for both kind of movements in the stock market. If an upward movement of stock happens over the threshold, it enters an upper circuit and if a downward movement happens in the stock beyond the threshold, it enters a lower circuit.
Why are circuit breakers required?
The relevance of circuit breakers is to control the stock is to control the stock markets at times when they seem to move a point beyond reasonable limits. When stocks reach upper circuit, they put investors to benefit and on the other hand, if it reaches lower circuit, they put investors to disadvantage as it becomes difficult to sell off their shares. A circuit breaker makes sure that such abrupt situations arise in the stock market.
Circuit breaker is certainly a new measure to address the volatility of stock market and has its own advantages. It helps the stock market to be coordinated in the best possible manner to facilitate both the buyers as well as sellers. Circuit breaker is certainly a tool applied by regulatory authorities to keep normalcy within the stock market.