Circuit Breaker In Stock Market In India: When a fresh scandal breaks out in the news about a big company, everybody everywhere starts talking about it. If it happens over the weekend, the market is unaffected.
But if it happens on a market day, we all know what comes next – A steep fall in the share price. This is how it works in major stock exchanges in the world.
But in India, we have a specific concept called circuit breakers that stop this from happening. The circuit breaker in stock market in India is a unique concept.
Even advanced markets like the US did not have circuit breakers in the past, allowing stocks to rise and fall substantially in a single day.
So what are circuits? How do they work? What is a circuit breaker in stock market in India? These are some questions we’ll answer while explaining the concept of circuits in the Indian stock market.
What Are Circuits?
The stock market thrives and deteriorates because of volatility. People turn into millionaires and just as quickly become poor.
When the 2008 mortgage crisis happened, people lost their homes, jobs, and entire life savings.
Before that was the dot com bubble of 2001, and prior to that was the 1987 Black Monday crash in the US stock market.
The 1987 crash was a major moment for the US markets, after which the concept of circuits and circuit breakers was introduced.
The first idea of a circuit was to allow a benchmark index to move within a certain range only. The upper limit of this range is what we know now as the upper circuit, and the lower limit is the lower circuit.
Whatever movement the indices might have on a market day, is limited to this range of movement, either in terms of points or percentages.
One of the goals of circuits is to reduce panic selling in the markets. When bad news breaks out, investors tend to panic sell their holdings, sending stocks, and effectively, entire markets crashing down.
This leads to millions of investors losing their investments, as the security would end up being worthless.
Circuit Breaker In Stock Market In India
The concept of introducing circuits in the Indian stock market came into play in 2001. SEBI (Securities and Exchange Board Of India) formed the market-wide circuit breaker protocol in June 2001, to protect investors from market crashes and as a result, immense losses.
The circuits are set to be implemented at three levels of index movement when they rise or fall by – 10 percent, 15 percent, and 20 percent.
From the official site of NSE, here’s an idea of what the circuit breaks would look like at different levels for Nifty 50:
|NIFTY 50 CLOSING AS ON 24-MAR-2023
|Index Circuit Filter Trigger Limit
|Equivalent Point (+/-) for 27-Mar-2023
By index, we mean Nifty and Sensex, two of the most important indices in the Indian markets. The above-mentioned levels of 10, 15, and 20 percent circuit breaks are applicable to these two indices, on a national level.
The circuit breakers also apply to individual companies, which have a cap on daily gains/losses. If the market does breach the circuit breaker, which is a highly rare event, then it will open with a pre-open call auction session.
The duration of the market halt as well as the pre-open session is given in the table below:
|MARKET HALT DURATION
|Before 1:00 pm.
|At or after 1:00 pm upto 2.30 pm
|At or after 2.30 pm
|Before 1 pm
|1 hour 45 minutes
|At or after 1:00 pm before 2:00 pm
|On or after 2:00 pm
|The remainder of the day
|Any time during market hours
|The remainder of the day
Pros And Cons Of Circuit Breakers In India
Here are the advantages and disadvantages of circuit breakers in the Indian stock market.
Pros Of Circuit Breakers In India
Below are the advantages of circuit breakers in the Indian stock market.
- Circuit breakers give time for investors and traders to mitigate losses. This also gives them time to reconsider their investments and cut back before the market falls further.
- Avoids panic selling, and saves investors from drastic changes in the share price of their stocks.
Cons Of Circuit Breakers In India
Below are the disadvantages of circuit breakers in the Indian stock market.
- Circuit breakers in the market don’t allow real-time price discovery of the security.
- The investors and traders who get wind of the market soon, take all the benefits. This leaves the others locked due to the circuit breaker, not allowing them to exit their positions/investments.
Without circuit breakers, we would see the once-in-a-lifetime movement of the markets on a daily basis. Indices would constantly rise and fall in double digits due to every announcement.
News and global events travel fast and due to that, reaction to the report also travels fast, and its impact is seen in the markets.
Due to the use of circuit breaker in stock market in India, we won’t get to see that happen and can sleep better knowing our portfolio won’t disappear overnight.
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