What is a Circuit Breaker in the Indian Stock Market?

 



The stock market is often seen as a place of opportunities and risks, where prices move rapidly based on news, demand, supply, and investor sentiment. However, sometimes the market can face extreme volatility—either a sudden sharp rise or a steep fall in stock prices. To prevent panic, protect investors, and maintain market stability, the circuit breaker system is used.

What is a Circuit Breaker?

A circuit breaker in the Indian stock market is a regulatory mechanism designed to temporarily halt trading when stock prices move beyond a pre-defined limit in either direction (up or down). This pause gives investors and traders time to assess the situation, avoid impulsive decisions, and bring stability back to the market.

Circuit breakers are applied to:

  • Individual stocks
  • Index levels (like Nifty 50 and Sensex)

How Do Circuit Breakers Work?

The Securities and Exchange Board of India (SEBI) has set rules for circuit breakers. If the market index moves beyond 10%, 15%, or 20% in a single day, trading is automatically halted for a specific duration.

Levels of Circuit Breakers:

  1. 10% Movement → Trading is halted for a short period (15 minutes to 1 hour depending on time of the day).
  2. 15% Movement → Longer halt (1 to 2 hours).
  3. 20% Movement → Trading is stopped for the rest of the day.

Similarly, individual stocks also have their own upper circuit (maximum allowed rise) and lower circuit (maximum allowed fall). For example, if a stock has a 5% circuit limit, it cannot rise or fall more than 5% in a single day.

Why Are Circuit Breakers Important?

  • Protects Investors: Stops panic selling or buying during sudden market shocks.
  • Prevents Market Manipulation: Large players cannot easily influence prices with massive orders.
  • Ensures Stability: Gives traders and regulators time to analyze the situation calmly.
  • Boosts Confidence: Retail investors feel more secure in a controlled trading environment.

Final Thoughts

Circuit breakers act like a safety net in the stock market. While they don’t stop losses or gains completely, they ensure that the market doesn’t move uncontrollably in a single day. For traders and investors, understanding how circuit breakers work is essential to manage risks effectively.

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