The term Circuit Breakers refers to a device that controls the flow of electricity when it detects any danger. This process is automatic. The same way the investors should learn about - what are stock market circuit breakers and circuit breaker types in stock market. Circuit breakers consider price fluctuations and curb the risk of incurring losses.
There are two more important things that you should know about; stock market circuit breaker history in India and stock market circuit breaker rules in India. If you know the history, you can detect the pattern and the method of how this concept works. And you are required to know about the current stock market circuit breaker rules in India so that you can use them following the law.
What are stock market circuit breakers?
A Circuit breaker can be said as upper limits and lower limits within which the market index fluctuates every day; these limits are decided by the previous day's closing price. Circuit breakers are kind of a halt to control the Panic selling.
The Index in the market cannot fall below the lower limit or cannot rise above the upper limit.
The filters on the other hand, help in restricting the extreme price fluctuations and help the investors to protect their invested money.
Circuit breakers are the mechanism operated by the regulatory authority in order to maintain balance in the market. So, now you must be clear about stock market circuit breakers.
Stock market circuit breaker rules in India
Suppose you have a sports car that goes up at 200 km/h. But the brakes of that car are loose. Then would you consider driving that car? - No, right? The reason for this is there is no control over speed and, therefore, no safety.
In the same way, everything must have some type of control. The Indian Stock Exchange, controlled by SEBI (Security and Exchange Board of India) SEBI has created some rules that apply to both BSE and NSE for managing the stock market and increasing fair trade practices by the investors and brokers.
There are three stages in which this rule applies; the stock trading stops for a few minutes. This halt is based on some criteria such as, when the Index rises drastically or falls drastically, 10%, 15% or 20% then the average one, then this rule of halt is applicable. This implies to all equity and equity derivative markets on the national scale.
A National level Circuit breaker is applied if any BSE or NSE Sensex faces a breach in their operation exceeding the standard limit.
It is logical that when the price of any stock hits the upper limit, there will be only buyers of that stock and no sellers. On the other hand, when the circuit switches to the lower limit, only sellers and no buyers will be there. Circuit breakers have different criteria in all the nations globally. For instance, U.S.A. markets have 7%, 13%, and 20 % Criteria for a Particular stock price.
Circuit breaker types in the stock market
There is some predefined halt duration in the Indian stock market in case of a breach.
They are as follow:
If there is a 10 % rise or fall before 1:00 pm, the trading of those derivatives will be on halt for 45 minutes.
If there is a 10 % Rise between 1:00 pm and 2:30 pm, trading will stop for 15 minutes.
10% Rise or Fall after 2:30 pm - there will be no halt.
If there is 15% movement before 1 pm, there will be a halt of 1 hr 45 mins.
If there is 15% movement after 2:30, the trading stops for the remaining day.
And the last case, if 20 % movement is seen during any period, then it stops there for the whole remainder of the day.
Stock market circuit breaker history in India
It all started on a black Monday when the world market crashed. In 1987, the crash began in Hong Kong, and whose vibrations were seen in the U.S.A. This crash or incident led to the birth of Circuit breakers as a regulatory measure. These guidelines were accepted by all the other countries, too, to protect their people's money.
SEBI passed and ruled and circulated the same in June 2001, and SEBI asked the Exchange board to implement the same. The rules were modified in the year 2013 earlier the limits were set every quarter, but after these modifications, it is hardened daily. So this is stock market circuit breaker history in India.