What is a Circuit breaker in Trading?

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What is a Circuit breaker in Trading? Blog Image

Overview:

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?