When a security or market index drops significantly, implementing Circuit breakers are regulatory mechanisms that temporarily halt trading when a security or market index experiences a significant decline, preventing panic selling excessive market volatility. ‘ A drop in prices is followed by a period of suspension of trading, allowing investors to review their investment decisions and avoid making sudden, emotion-driven purchases.
Circuit breakers are indispensable for maintaining market stability, especially in times of high uncertainty or economic downturn as they help prevent markets from spiralling out of control and enchance investor confidence.
The Science of Circuit Breakers
A security or market index may experience a percentage decline in value during one trading session, which triggers circuit breakers. A short-term pause in trading, lasting 15 minutes, may be necessary if the market drops by 10%. Trading may be suspended for an extended period or possibly for the entire day if the decline hits 20%.
These breaks enable investors to process information, evaluate the situation and make more logical decisions.’ Stabilizing markets and preventing panic selling are the main objectives of circuit breakers, which prevent excessive price swings.
Key Features Of Circuit Breakers
This is what you need to know about circuit breakers:
- Market Stability: Circuit breakers prevent market crashes and panic selling by preventing extreme volatility. This is known as market stability.
- Indicators: Trading is paused for a set period at the start, giving investors time to manage emotions and avoid impulsive decisions that are driven by fear or panic.
- Set Levels: Circuit breakers are triggered at specific percentage drops of 10%, 15% or 20%. International use of circuit breakers: Many global stock exchanges, including the NSE and BSE in India, maintain good market order.
Conclusion
Circuit breakers are essential in ensuring market stability and shielding investors from sudden fluctuations. They also prevent panic-induced decisions by temporarily stopping trading during sharp declines. Open your account with Religare Broking and see how circuit breakers can help limit exposure and trade with confidence in the financial markets.
