Circuit filters in the stock market, known as price limits or circuit breakers, prevent excessive volatility and protect investors from extreme fluctuations. They set predefined upper and lower price limits, triggering a temporary trading halt when these limits are reached. This allows investors to assess the situation and make informed decisions before trading resumes.
Key Purposes of Circuit Filters:
- Prevent Extreme Volatility
- Circuit filterslimit excessive price movements in a single trading session, helping maintain market stability.
- Protect Retail Investors
- Prevents retail traders from suffering heavy losses due to sudden price spikes or crashes caused by speculation or manipulation.
- Control Market Manipulation
- Stops unethical price riggingby large traders or operators who might attempt to inflate or crash a stock’s price artificially.
- Avoid Panic Selling & Buying
- During market crashes, lower circuits slow down panic selling giving investors time to reassess decisions.
- Upper circuits prevent irrational exuberance when stock prices rise too fast.
- Provide Cooling-Off Periods
- In cases of major price swings, circuit limits trigger temporary trading halts
- Ensure Orderly Trading
- Helps exchanges and regulators maintain fair price discovery by preventing excessive speculation and herd behaviour.
Example:
If a stock trading at ₹100 has a 5% circuit limit, its price cannot go above ₹105 or below ₹95 in a single session.
