What is Circuit Breakers in stock market in India : Stock market is not stable. Everytime price of each stock is fluctuating. So the whole stock market is volatile. To decrease the volatility of the whole stock market or individual stock a new system was launched in stock market. The principal of circuit breaker in electricity is used in this system. We see circuit breaker in our home. When current is either up or down from the set limit in our home the circuit is automatically break. This concept is used also in stock market. In this article circuit breaker in stock market in india is described vividly.
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What is Circuit Breakers in stock market in India?
Nifty and Sensex,the two main indices of stock market in india have circuit breakers. Every stock has price bands like circuit breaker. Circuit breaker helps to reduce the extreme volatility or to keep price movement in specific range. Each and every stock has their own price bands like 2%,5%,10%,20%. For example let think stock ‘p’ is a stock whose previous day closing price is 1135.25 rupees per share. And today lower price band limit is 908.20 rupees/share and upper price band limit is 1362.30 rupees/share.
Circuit or price band limit is depended on the previous day closing price. Stock ‘p’ has the price band of 20%. So the lower limit of price band is 20% lower than the previous day closing price and the upper limit of price band of ‘p’ stock is 20% upper than the previous day closing price. So today if stock ‘p’ ‘s share price hit the lower price band 908.20 rupees or the upper price band 1364.30 rupees then the trading of ‘p’ stock is suspended for the day.
Share price can move only the range of the stock’s price band for the day. That stocks which have derivative products like future & options (F&O) have no price bands. On the other hand nifty and sensex have 3 stages in circuit breaker like 10%,15%,20%. Let’s explain how it works.
Observing the table you can see if before 1:00 pm nifty or sensex is either up or down 10% from the previous day closing price then stock market will be closed for 45 minutes. After 45 minutes pre opening session (check stock market timings in india) will start and then normal trading session will start. For example, if nifty or sensex ‘s value is 10% up or down from the previous day closing price at 12 pm then stock market will be closed for 45 minutes.
At 12:45 pm pre-opening session will start and next normal trading session will start at 1:00 pm. If nifty or sensex is either up or down 10% from the previous day closing price at or after 1:00 pm upto 2:30 pm then stock market will halt for 15 minutes and next 15 minutes is the pre-opening session and then normal trading session will start. In this way circuit breaker of nifty or sensex works as per the above table is described.
Circuit breakers of nifty or sensex is decided by SEBI which is market regulator. And the price band of each stock is decided by stock exchange (NSE,BSE). Pricr bands of stocks is decided by observing the movement os this stock’s share price. If price band of any stock is 10% and share price of this stock continuously hit the price band limit then stock exchange can do the price band 5% from 10%. The decision of increase or decrease of the price band is done on the basis of Stock Exchange Surveillance Department criteria.
In cash market if you do short selling intraday trading means you sell the stock but before buying the stock if nifty or sensex hit the upper or lower circuit or share price hit the upper or lower price band of this stock then this stock is suspended to trade for the day. And you are declared Defaulter and your short position will settle in auction market.
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