What is the meaning of circuit breaker stocks?
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What is circuit breaker?
To avoid abnormal fluctuations in the share prices and index, circuit breakers are applied in keeping with the SEBI guidelines. According to the guidelines, stocks and indices can trade between a price band. During the day if prices of shares or the index fluctuates abnormally and touches either the high or low price bands, the trading halts in case of the index. However, in case of shares, trading goes on but the price of the share does not move beyond the stipulated band.
How does it work?
In case of the major indices - Nifty and Sensex - the duration of the trading halt depends upon the quantum of the fluctuation and timing i.e. at what time of the day such fluctuation takes place. Circuit breakers apply in three levels - 10%, 15% and 20%. A fluctuation of 20% or above during the day in these indices halts the trading for the rest of the day. A fluctuation of 15% before 1pm halts trading for two hours.
However, if it happens during 1pm to 2pm, trading gets suspended for the next one hour. But the trading halts for the whole day if either of the indices fluctuates by 15% after 2pm. In case either of these indices touches the price band of 10% till 1pm, trading halts only for an hour. The trading recommences within half an hour if this happens during 1pm to 2.30pm and there is no halt in trading if it happens after 2.30pm. These percentages - 10%, 15% and 20% - that trigger circuit breaker in the index are calculated on the closing value of the last day of the previous quarter.
As far as individual stocks are concerned, price bands differ for different stocks and ranges from 2% to 20%.
Why do stocks touch circuit breakers?
Generally speaking, when demand of a share is higher than supply, share price appreciates. Similarly, oversupply pulls the share price down. An abnormal buying and selling pressure triggers the circuit breaker.