What is a Circuit Breaker in NEPSE?
In the volatile world of stock markets, mechanisms are needed to prevent panic selling and to maintain order. One such mechanism is the "circuit breaker." For investors and traders in the Nepal Stock Exchange (NEPSE), understanding circuit breakers is crucial for navigating market fluctuations.
What is a Circuit Breaker?
A circuit breaker is a regulatory measure used to temporarily halt trading on an exchange to curb panic selling and excessive volatility. When prices move beyond predetermined thresholds, trading is paused, allowing investors to take a breather, gather information, and make more rational decisions. This mechanism aims to maintain stability and investor confidence.
How Do Circuit Breakers Work in NEPSE?
NEPSE has established circuit breaker rules to protect the market from extreme volatility. The circuit breaker levels are based on the percentage change in the NEPSE index compared to the previous day's closing index. Here's a breakdown of the thresholds:
- First Level (4% Movement):
- If the NEPSE index moves up or down by 4% from the previous day's closing, trading is halted for 20 minutes.
- Second Level (5% Movement):
- If the NEPSE index moves by 5% after reopening from a first-level halt, trading is paused for another 40 minutes.
- Third Level (6% Movement):
- If the index fluctuates by 6%, trading is halted for the remainder of the trading day.
These levels are designed to progressively slow down trading, giving investors time to reassess market conditions.
Why Are Circuit Breakers Important?
- Prevent Panic Selling: Circuit breakers prevent the market from crashing due to panic selling by giving traders time to calm down and reassess their decisions.
- Market Integrity: They help maintain the integrity of the market by reducing the impact of short-term speculation and rumors.
- Investor Protection: By pausing trading during extreme volatility, circuit breakers protect investors from significant losses that can occur in a highly volatile market.
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