What is a Circuit breaker in Trading?

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What is a Circuit breaker in Trading? Blog Image


Recently after the Hindenburg revelations, many of the Adani Group companies’ stocks have hit the lower circuits in subsequent trading sessions.

About Circuit breaker in Trading:

  • The Securities and Exchange Board of India (SEBI) implemented index-based market-wide circuit breakers in June 2001.
  • Circuit breakers are triggered to prevent markets from crashing due to a panic-induced sale of stocks. 
  • This can occur for a variety of reasons, leading to stockholders in the market believing that their stocks are overvalued. As a result, they engage in a sell-off.
  • Circuit breakers temporarily halt trading, thereby halting the sell-off.
  • Circuit-breakers effectively limit how much a stock's value can fall in a single day/trading session, resulting in a more stable market overall.

How do these work?

  • This index-based market-wide circuit breaker system applies at three stages of the index movement, at 10, 15 and 20 per cent.

When triggered, these circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide.


Q1) What is the equity derivative?

An equity derivative is a financial instrument whose value is based on the equity movements of the underlying asset.

Source: Most Adani stocks hit lower circuits again: What is a circuit breaker in the stock market?