88 what is circuit breaker in stock market

In the stock market, a circuit breaker is a mechanism designed to halt trading in a particular stock, index, or market segment when it experiences a significant price drop or volatility surge. The purpose of a circuit breaker is to prevent a market meltdown or a rapid decline in prices, which can lead to investor panic and further market instability.

There are different types of circuit breakers, but the most common ones are:

  1. Single-stock circuit breaker: This type of circuit breaker is triggered when a specific stock's price falls by a certain percentage (e.g., 10%) within a short period (e.g., 5 minutes). Trading in that stock is halted until the price recovers or a predetermined time period has passed.
  2. Index circuit breaker: This type of circuit breaker is triggered when a major stock market index (e.g., S&P 500, Dow Jones Industrial Average) falls by a certain percentage (e.g., 7%) within a short period (e.g., 15 minutes). Trading in all stocks within that index is halted until the index recovers or a predetermined time period has passed.
  3. Market-wide circuit breaker: This type of circuit breaker is triggered when a broader market indicator (e.g., the VIX volatility index) reaches a certain level. Trading in all stocks and indices is halted until the market stabilizes or a predetermined time period has passed.

Circuit breakers are designed to:

  1. Prevent panic selling: By halting trading, circuit breakers can prevent a rapid decline in prices, which can lead to investor panic and further market instability.
  2. Stabilize the market: Circuit breakers can help restore confidence in the market by providing a temporary pause in trading, allowing investors to reassess the situation and make more informed decisions.
  3. Protect investors: By limiting the potential losses, circuit breakers can help protect investors from significant losses during periods of extreme market volatility.

It's worth noting that circuit breakers are not a guarantee against market crashes or significant price declines. They are designed to provide a temporary pause in trading to help stabilize the market, but they do not eliminate the risk of market volatility.