Stock Market

12.

What are upper and lower circuit breakers?

Any stock exchange can moderate trade only during its specified trading hours. The trading hours of world’s largest stock exchange NYSE is between 9:30 and 16:00 and that of India’s largest (by means of market capitalization), BSE is between 9:15 and 15:30. There are occasions when the market is too turbulent so that the index may climb steeply or fall sharply. During these occasions, prices of certain shares may spike or plunge in a single day, neither of which is healthy for trade. While sharp falls in prices leads to panic selling, high gains can exhaust liquidity and lead to excessive speculations. 

A circuit breaker is a concept whereby trading is halted for a few hours, or in extreme cases, the day’s trade is suspended for a stock if its price increases beyond or decreases below a predetermined value that is calculated based on the previous day’s closing price. Circuit breakers are specific to stock exchanges in that the percentage change in value after which it gets activated varies with stock exchange while some stock exchanges may not even have this concept. For example, BSE has an upper circuit breaker of 20% and a lower circuit breaker of 10%. If a stock closes at Rs.100 on a day and if the stock reaches Rs.120 on the next day, then the circuit breaker becomes active and trading of that stock is halted. Similarly, if the stock falls to Rs.90, again trading is halted.