Circuit Breaker

Market sentiments are very difficult to predict and stock prices can move in any direction, defeating all logics. The term circuit breaker refers strong defensive measures that are used by stock exchanges for limiting the damage that are caused by fall in stock prices. It is also sometimes referred to as the ‘collar’. The main purpose of a circuit breaker is to prevent panic selling when a sharp downward movement in price takes a dangerous momentum. In such situations, a circuit breaker works by allowing the exchange to suspend trading and prevent things from getting out of control. In short, it is a system implemented for maintaining sanity of the stock market. Circuits are generally classified into two types, stock circuit and index circuit.

For example, the exchange might discontinue its trading activities for the rest of the day, if there is a fall in the Dow Jones by 30 percent from the close of the previous day.

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Edited and Updated 31st May 2014

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