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Circuit System in Sensex

Circuit System in Sensex

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Published by shivmittal

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Published by: shivmittal on Sep 04, 2010
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What is a circuit? Circuits are of two types - circuit for an index and for a stock.

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. Securities and Exchange Board of India [ Images ] specifies this threshold as a percentage of the prior day's closing figures. What is a circuit breaker? Factors like market speculations force stock prices or indices to enter in a circuit. Such a condition is beyond the control of regulatory authorities. Hence they use the circuit breaker to curb such market situations. Circuit breaker, simply put, is a set of rules formed and issued by SEBI in order to bring back normalcy in the stock markets in the event an index or stock enters a circuit. SEBI has different circuit breakers for indices and for stocks. Circuit breaker for an Index Circuit breakers are applied only on equity and equity derivative markets. Whenever the major stock indices like BSE Sensex and Nifty cross the threshold level, SEBI rules require that the trading at the stock exchange be stopped for a certain period of time beginning from half an hour to even an entire day. The time frame for which trading is stopped depends upon the time and amount of movement in the indices. The idea is to allow the market to cool down and resume trading at normal levels. The thresholds are implemented stage wise. Movement in Indices 10 per cent Time Before 1.00 pm 1.00 pm to 2.30 pm After 2.30 pm 15 per cent Before 1.00 pm 1.00 pm to 2.30 pm After 2.30 pm 20 per cent Any time Close period 1 hour ½ hour Does not close 2 hour 1 hour Close for the rest of the day Close for the rest of the 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. Price bands of 20 per cent are applicable to all remaining scrip like preference shares or debentures. For example, for a stock with a price band of 5 per cent that closes at Rs100 on the previous day, the price band will be between Rs 105 and Rs 95. What are an Upper circuit and Lower circuit?

. The objective of circuit breakers is to control the stock markets at times when they move beyond reasonable limits. On the contrary a stock movement into a lower circuit places the investor at a disadvantage because it is now difficult to sell off these shares as they have lost a lot of money. An upward movement over the threshold will cause a stock to enter an upper circuit. When a stock enters an upper circuit. it puts an investor who has already invested in the stock at an advantage.Stock prices can either move up or down and hence circuit breakers are required for movements in both directions. Similarly a downward movement in stock price beyond the threshold will cause a stock to enter a lower circuit.

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