The stock market is subject to volatility, with sociopolitical situations and pandemic conditions triggering this volatility. As the world is now trying to recover from the aftermath of the COVID-19 pandemic, the stock market is likely to get more volatile amid uncertainty once businesses reopen. Such extreme fluctuations can make or break stockholders. In 2001, stock market regulator Securities and Exchange Board of India (SEBI) introduced stock market circuit breakers to control such fluctuations in share prices.
What is a circuit breaker in the stock market?
This term is borrowed from an electric circuit breaker. A circuit breaks due to the extreme flow of electricity or damage to avoid any danger. Circuit breakers in the stock market can be seen when investors send the share price of any listed firm up or down by 10%, 15%, and 20% in the span of the open window. In this case, stock exchanges halt the trading in that stock to investigate insider trading or any irregularities. Exchanges stop trading in that stock for the remaining session if a stock falls or gains at or over 15% at or after 2 pm.
The double-digit volatility in share prices could lead to massive losses for some investors, and others may make attractive gains. Here, the securities regulator plays a vital role to avert illegal trading activities or scams.
The share market circuit breakers are prompted at three different phases of the price trajectory fluctuation: at 10%, 15%, and 20%, according to SEBI. If such high volatility occurs, trading will be stopped for some time. For example, if the stock market today were to slump or rise over 10% before 1 pm, the lower circuit would be activated for 45 minutes. If it plunges to more than 15% at or after 2 pm, trading in the share market will be halted for the remaining session.
Advantages of circuit breakers in the share market
Any type of panic trading prompts investors and traders to sell or buy stocks without knowing the fundamentals. Stocks at lower prices are not always undervalued, and shares at higher values are not always overvalued. Hence, investors require trustworthy advisors and fund managers who track the equity market diligently. Meanwhile, circuit breakers sometimes buy out for investors to take hold, sell, or buy decisions. On top of that, circuit breakers also avert a sharp market crash.
Disadvantages of circuit breakers
A circuit breaker halts real-time trading that prevents investors from identifying real-time share value for a specific duration.
For instance, you may invest in the share market before a stock-related news breakout that may trigger circuit breakers. Bullish sentiments could help you to gain double-digit returns. However, in case of bearish sentiments, you could witness a double-digit loss in your stock holdings.
How can investors benefit from circuit breakers?
Circuit breakers in the stock market are required to avert panic trading. These breakers help investors to identify genuine catalysts behind any price rally or sharp dip. You as an investor ought to know about the market procedures before you start investing. If you are a novice planning to invest in share market, it is prudent to consult a financial advisor. An advisor will not only suggest plans that are based on your investment goals and risk appetite but will also help you minimize any aligned risks to stock market investing.
