What is Circuit Breaker in Stock Market?

If you’ve ever watched the news and heard that “trading has been halted due to a circuit breaker,” you might have wondered what that really means. It might sound technical, but the concept is quite simple, especially when you compare it to the everyday circuit breaker used in your home.

In your house, a circuit breaker is used to cut off electricity when the system is overloaded or there’s a short circuit. It’s a safety measure to protect your appliances and wiring from serious damage.

Similarly, the stock market has its own version of a circuit breaker. This system stops trading when things get too hot, either because the market is crashing or rising too fast. In this article, we’ll walk you through everything you need to know about circuit breakers in the stock market.

What Is a Circuit Breaker?

A circuit breaker in the stock market is a mechanism that halts trading on an exchange temporarily when the prices of stocks or indices move too sharply within a short span of time. This pause helps to prevent panic selling or irrational buying, which can lead to extreme price swings.

It gives traders, investors, regulators, and stock exchanges a short break to assess the situation and make decisions more rationally. Think of it as pressing the “pause” button when the movie gets too intense.

Circuit breakers can apply to individual stocks or to the entire market.

Why Are Circuit Breakers Used?

Circuit breakers were introduced to protect the financial markets from extreme volatility. Stock markets, like any other market, are influenced by news, sentiment, rumours, and global events. Sometimes, a sudden piece of negative news can create a sense of fear, leading to large-scale selling. Similarly, overly positive news can cause people to buy aggressively, pushing prices up too fast.

Without circuit breakers, markets could crash within minutes, wiping out a huge amount of investor wealth. The Indian market regulator, SEBI (Securities and Exchange Board of India)—has put this mechanism in place to avoid a situation where traders act out of fear or greed and destabilise the entire financial system.

Here’s what circuit breakers help to achieve:

Prevent market crashes: They limit how much the market can fall in one day.
Protect small investors: People who don’t track the market every second are shielded from sudden damage.
Give time for clarity: When trading pauses, investors can digest news and decide based on facts rather than emotion.

How Do Circuit Breakers Work in India?

In India, circuit breakers are of two types:

Market-wide circuit breakers
Stock-specific circuit breakers (price bands)

Let’s start with market-wide circuit breakers.

Market-Wide Circuit Breakers

Market-wide circuit breakers are triggered when either the Nifty 50 or the Sensex moves by 10%, 15%, or 20% in either direction, compared to the previous day’s closing level. These circuit breakers apply to the entire market and not just a single company or stock.

Here’s how they work:

10% Movement

Before 1 PM: Trading is halted for 45 minutes.
Between 1 PM and 2:30 PM: Trading is halted for 15 minutes.
After 2:30 PM: No halt is imposed.

15% Movement

Before 1 PM: Trading is halted for 1 hour and 45 minutes.
Between 1 PM and 2 PM: Trading is halted for 45 minutes.
After 2 PM: Trading is halted for the rest of the day.

20% Movement

At any time during the trading session: Trading is stopped for the entire day.

These time-based rules ensure that trading resumes only after investors have had a chance to calm down and reassess the situation.

Stock-Specific Circuit Breakers

Apart from the overall market, individual stocks also have their own circuit limits, often referred to as price bands. These price bands limit how much a stock’s price can rise or fall in a single day.

The common stock-specific circuit limits in India are:

The percentage depends on how volatile the stock is. A small company or penny stock may have a tighter circuit limit (like 2%) to prevent price manipulation. More stable or large-cap stocks may have wider bands like 10% or 20%.

For example, if a stock closes at ₹500 and has a 10% circuit limit, then it cannot go below ₹450 or above ₹550 the next day. If it hits either limit, trading in that stock is paused for some time.

Real-Life Examples of Circuit Breakers in India

Understanding how circuit breakers work becomes easier when you look at real events.

March 13, 2020 – COVID-19 Market Crash

As fears around COVID-19 spread globally, Indian markets crashed. On 13th March 2020, both the Sensex and Nifty fell over 10% within minutes of opening. This triggered the 10% market-wide circuit breaker, and trading was halted for 45 minutes. Once markets resumed, the pause helped prevent further panic selling.

May 17, 2004 – Election Results Shock

After the general election results in 2004 surprised investors, markets reacted sharply. The Sensex dropped over 800 points, which was a big fall at that time. A 15% circuit breaker was triggered, leading to two trading halts that day.

These events show how circuit breakers can help reduce panic and bring order back to the markets.

What Happens During a Circuit Breaker?

Once a circuit breaker is triggered, trading is paused on the stock exchanges. During this time, no new trades can happen. Investors can still view prices and charts, but they cannot buy or sell shares.

Stock exchanges like NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) coordinate with SEBI and issue alerts or notices to inform investors.

Once the pause time is over, trading resumes—usually with more cautious activity.

Circuit Breaker vs Trading Halt

You might wonder if a circuit breaker is the same as a trading halt. The answer is—not quite.

Circuit Breaker: Triggered by price movements in the market or a stock. It is automatic and based on fixed percentage limits.
Trading Halt: Can be imposed for reasons like corporate announcements, regulatory violations, or suspected fraud. It may apply to just one company and is usually done manually by the exchange or SEBI.

What Should Investors Do During a Circuit Breaker?

As an investor, the best thing you can do when a circuit breaker is triggered is to remain calm.

Here’s what you can do:

Follow the news: Try to understand what caused the market movement.
Avoid placing impulsive orders: Wait for the market to reopen.
Stick to your plan: If you’re investing for the long term, these short-term swings should not affect your decisions.
Use the pause wisely: Re-evaluate your holdings and financial goals if needed.

How Can You Track Circuit Breakers?

You don’t have to be a full-time trader to stay informed. Most brokerage platforms will send real-time alerts when a circuit breaker is triggered.

You can also check the official websites of NSE (www.nseindia.com) and BSE (www.bseindia.com) for live updates.

Conclusion

Now that you know what circuit breakers are and how they work, you can better understand their role in protecting the stock market and investors. These tools are not just for big institutions—they protect everyday investors like you from sudden shocks and unfair losses.

Whether you’re a beginner or someone with experience, it’s important to recognise that circuit breakers bring order during chaos. The next time the news flashes a headline about trading being halted, you’ll know exactly why that happened—and how it’s a part of a well-designed system to keep the market stable.