Hello Friends, In this blog post(What is a circuit breaker in the share market) you will come to know about the circuit breaker in the share market or stock market. The circuit breaker is a range or band of two prices one low and one high, between which the share market is supposed to fluctuate within a single trading day.
If you could not understand the meaning of circuit breaker from the above paragraph then don’t worry I will make you understand this with the help of a very simple example later in this blog|What is a circuit breaker in the share market|
What are the types of circuit breaker?|What is a circuit breaker in the share market?
There are two types of circuit breakers one is a lower circuit and another is an upper circuit|What is a circuit breaker in the share market|
The lower circuit is the lowest value for any share or index below which a share price can not go down for a single trading day|What is a circuit breaker in the share market|
And the upper circuit is the highest limit of any stock and index above which a share price can not go up for a single trading day.
Don’t worry if you could not understand it yet then we are explaining you with the help of one example below.
let say there is one stock of Tata motor whose current share price is 100 rupees. And its lower circuit is 90 rupees and the upper circuit is 110 rupees.
So assume that this is the beginning time of the market and now the stock price of tata motors start to fluctuate. If the price of tata motor either touches 90 rupees or 110 rupees, the stock trading for tata motor will be halted for some time and will begin with a 15 min pre-open session.
In other words, if the price of tata motor touches either the lower circuit which is 90 rupees, or touches the upper circuit which is 110 rupees then the trading of tata motor will be stopped for some time say 45 min and then it will again start with a pre-open session of 15 min.
And once this pre-open session finishes then the regular trading will start for stock and index.
Who and how the value of the lower and upper circuits is decided?
The lower and upper circuit value is decided by the stock exchange on the basis of stock volatility. and it is generally applied with a percentage range of 5%, 10%, 15%, 20%.
And stock exchange will decide which stock shall have which amount of percentage as a lower circuit and upper circuit.
And this lower and upper circuit is applied to the previous day’s price value of any stock and index.
for example, if the reliance power has the closing price of 100 rupees then the next day lower and upper circuit on the basis of 10% will be 90 rupees and 110 rupees respectively.
Wo this lower and upper circuit value is not a permanent value or fixed value. This value is changed with the time and stock value. But this is updated every day before the start of the share market.
Who monitors the lower circuit and upper circuit and halt the stock trading and index trading?
This is always monitored by the SEBI and once the lower or upper circuit is touched then the market or stock trading is immediately halted for some time and later open with a 15 min pre-open session.
And there are different time halting for different percentage amounts of lower and upper circuits which you can see here in this extensive blog.
What is the real purpose of this lower and upper circuit or circuit breaker? How these circuit breakers protect the investor and broker from a sudden huge loss.
As in general this is beneficial for all kinds of share marketing whether it is delivery, intraday, future, and option.
But for retail users (who are last to react to any news and activity related to their stocks) or clients who hold the money for a long time and make a profitable return this circuit breaker is very important as they protect their huge loss and limit it up to some extent and give them time to act upon their stocks.
suppose you have invested on 1000 on any stock whose price was just 10 rupees five years back. Now the stock price is 80 rupees. And you are at the profit of 70000 now.
But if now the market crashes badly and your stock value turns to 0 then you will lose everything that you have earned in 5 years in just one day. How bad would it be? really it is!
So to protect such a situation exchange put the lower and upper circuit for every stock and index for each day so that investors like you can be safe even in such a drastic crash of market or stock.
So in the above-given example how will you be safe?
We are continuing the reference of the above example. you had earned a profit of 70000 as your stock price was at 80 rupees which had been bought by you at 10 rupees five years back.
So now when the stock price is at 80 rupees then there will be a lower and upper circuit on it says 72 as a lower circuit and 88 is the above circuit.
So this means in one single trading day when the market crashes badly your stock price will only fall up to 72 rupees and the stock trading will be halted for some time.
And this is the time when you can take action upon your stock whether to keep it the same or sell it as soon as possible.
But this is for sure that your profit and money will not be zero. You can have some loss on profit but still, you will get a handsome amount of profit from your stock selling. And after selling you can again buy it at the lower circuit price for the future or long-term.
Hope! now you would have got the importance of the lower and upper circuits.
What is the disadvantage of the upper circuit? What is the need for an upper circuit?
See, it is not all about the profit and loss, it is more about the buyer and seller. Now I make you understand this circuit with the help of real-life examples.
We buy the onion from the onion seller, suppose the price of onion remains on increasing every day without any stop then what will happen one day?
We will stop buying the onion from the seller. And the seller and the onion store who have lots of onion will not make any profit from onion as there are no buyers of onion now. And their onion will be waste after some time.
So price limit is always necessary to make a balance between buyer and seller. So with the same concept of onion buying and selling, the stock market also works on the same concept.
If there will be only buyers then whom they will sell it after some time. Or there is only a seller then who will buy after some time.
So to run the market in a proper way limitation on price is very necessary so that all the traders can exist in the market and can increase the volatility of any stock and index.
And the disadvantage of upper circuit hits is when you have an open short position in the intraday market.
And when the upper circuit is hit then there will be no seller so you can not buy back your shares before the market is closed. And your stock will be converted as the delivery stock automatically.
Are these circuits kept on stock or index(Sensex and Nifty)?
Yes, these circuit breakers are both stocks and indices. But when we talk about circuits on single stock then is called the band and when we talk about circuit on the indices it is called the circuit filter.
Once the circuit is touched in the case of stock then the stock trading is halted for some time. And once it is touched in the case of the index then the whole market is stopped for some time.
So Friends, In this blog post(What is a circuit breaker in the share market) we have discussed the circuit breaker which has mainly two types one is a lower circuit and another is an upper circuit. Both the circuits are used to limit the price of any stock and indices in a single trading day. This circuit is updated on daily basis by the stock exchange on the basis of stock price and volatility. And SEBI has a keen eye on this circuit and stops the trading once either of them is touched within one single trading day.
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