How to anchor the Daily Trade?

Any Stock exchange moderates trade during its specified trading hours. The trading hours of India’s largest exchange (in terms of market capitalization) i.e BSE is between 9:15 and 3:30pm. So the very act of buying and selling of shares which takes place over computer, phone calls or manual interpretations during this time by any individual is called as Share Market Live!

Stock prices of companies listed on the stock exchanges are often influenced by various factors such as company financials, investor's perception, industry trends, government regulations, market speculation etc. Most of the factors are predictable and can be studied and analyzed using statistical tools like graphs and techniques like ratio analysis, trend analysis, theory of probability etc. While certain other factors and their influence on prices of a particular stock and the degree of their impact are completely unpredictable.

Many times share market live sentiments are unable to predict accurately and their impacts on stock prices is difficult to judge. The movement of stock prices can beat all your logic and move tremendously in any direction. Share market gets too turbulent due to which index may tend to climb steeply or fall sharply. During these occasions, prices of certain shares may shoot or plunge in a single day, neither of which proves healthy for trade. While sharp fall in prices leads to panic selling, high gains can exhaust liquidity and lead to excessive speculations.

To curb the turbulence of the market; SEBI introduced a concept called “Circuit Breakers” 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. So, if an index or the price of a stock increases or declines beyond a specified threshold it is said to have entered into a circuit.

Circuits are of two types - circuit for an index and for a stock. The main purpose of circuit is to curb panic selling. There are two types of circuit breakers: If the stock or index moves in upward direction and violates the upper limit then that stock or index will come under upper circuit breaker. And if the stock or index moves in downward direction and violates the lower limit then that stock or index will come under lower circuit breaker. Thus, Circuit Breaker is a system to sustain sanity of the share market live scenarios while trading.

Circuit breaker for an Index

Circuit breakers are applied only on equity and equity derivative markets. Whenever the major stock indices like BSE and Nifty cross the threshold level, SEBI rules require that the trading at the stock exchange be stopped for a certain period of time ranging from half an hour to even an entire day.

Circuit Breaker for a stock

A price band specifies the span or price range for a stock to move without any interference from regulatory authorities. Only when the stock prices move beyond the range, it is considered as entering into a circuit and circuit breakers are applied. Daily price bands of 2 per cent, 5 per cent and 10 per cent are applicable to different equity stocks.

Conclusion

The objective of circuit breakers in the share market live scenarios is to control the stock markets at times when they move beyond reasonable limits. When a stock enters an upper circuit, it puts an investor who has already invested in the stock at an advantage. On the contrary a stock movement into a lower circuit places the investor at a disadvantage as it becomes difficult to sell off these shares as they have lost a lot of money.

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