What is circuit breaker?

A circuit breaker in finance is a regulatory mechanism that is designed to temporarily halt trading on a stock exchange in order to prevent panic selling or buying and to allow investors time to reassess their positions. Circuit breakers are usually triggered by a significant drop in the value of a stock or an index, and they are intended to provide a cooling-off period during times of extreme market volatility. The purpose of a circuit breaker is to prevent market crashes and to ensure that trading remains orderly and fair. By halting trading when the market experiences rapid and severe fluctuations, circuit breakers can help to prevent a downward spiral of panic selling and can give investors time to gather information and make more informed decisions. Circuit breakers are typically implemented by stock exchanges and regulatory bodies, and they are often based on predetermined thresholds for market volatility. Once triggered, a circuit breaker will halt trading for a specified period of time, allowing investors to regroup and evaluate their positions before trading resumes. This can help to stabilize the market and prevent the kind of rapid and extreme price movements that can lead to widespread financial instability. Overall, circuit breakers play an important role in maintaining the stability and integrity of financial markets, and they are an essential tool for preventing excessive volatility and panic-driven trading behavior. By providing a mechanism for pausing trading during times of extreme market stress, circuit breakers can help to protect investors and ensure that markets remain fair and orderly.