What are stock circuit limits or circuit breakers in stocks?

Circuit breakers or stock circuit limit triggers when the stock or index breaches its prescribed limits.

_stock circuit limits

The exchange board of India has set price bands or stock circuit limits to stop large price movements quickly. As the stock hits a lower or upper circuit limit, the remaining orders will stay pending at that stock's circuit price. The stock circuit limits decide the price range at which the stock will be traded on that day. The stock circuit limits depend on the stock's category, volume, and liquidity and are generally between 2 to 20%. 

Circuit Breakers in Indian Stock Market

The exchange board of India formulated the index-based market-wide circuit breaker. It was to prevent market crashes and protect investors from incurring heavy losses. The index movement at 10%, 15%, or 20% triggers the circuit filters. SENSEX and NIFTY 50 are the benchmark indices in India, and when either breaches the stock circuit limits, a nationwide temporary halt occurs. It is the same when a stock hits the upper or lower stock circuit limit. After the market's reopening, there is a 15-minute pre-open call auction which determines the stock's equilibrium price, depending on the supply and demand.

How Are The Circuits Decided? Who Decided Them?

The exchange board of India, SEBI, sets the stock circuit limits. Exchanges daily calculate the circuit limits for 20%, 15%, and 10% stages. It happens based on the closing price of the previous day's index.

Circuit Breaker Implications on Stock Trading

When the demand for a stock exceeds its supply in the stock market, it reaches its upper limit. It essentially equates to buying pressure being higher than selling pressure. Its opposite is also true. Usually, trading for a particular stock stops for the day when it hits a circuit. 

Advantages of Stock Circuit Limits

These are the advantages of stock circuit limits: 

  1. It helps avoid panic in investors and the market by directing toward a good market functioning. 
  2. Stock circuit limits allow investors time to think about reinvesting. The halt or stoppage time enables the traders to comprehend the announcements and news to take their next steps. 

Disadvantages of Stock Circuit Limits

These are the disadvantages of stock circuit limits: 

  1. Investors can't know the real-time prices of the stocks because the market halt prevents the price movement upon hitting stock circuit limits. 
  2. Early investors with access to the news before the stock circuit limits can benefit. However, the investors who did not get the news might incur losses. 

Circuit breakers or stock circuit limit triggers when the stock or index breaches its prescribed limits. The stock hits a lower circuit when sellers are more than the buyers. The opposite is also true. A global event or news can also trigger circuit limits. You might also witness circuit limits being triggered for no reason. It would help if you learned about circuit breakers before investing. 


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