Investing in the stock market involves risks, and sometimes these risks can lead to significant price fluctuations. To mitigate such fluctuations and ensure market stability, the Nepal Stock Exchange (NEPSE) has adopted a regulatory mechanism known as the circuit breaker. Let’s dive deeper into what circuit breakers are and how they function in NEPSE.
How Circuit Breaker Works in NEPSE
In NEPSE, the circuit breaker mechanism kicks in when there are sudden and substantial price movements in the market index. Here’s a breakdown of how it operates:
First-Hour Trading Suspension
If the NEPSE index experiences a decline of 4% within the first hour of regular trading, which is before noon, trading activities are suspended for 20 minutes. This initial circuit breaker aims to halt trading temporarily to prevent further drastic declines and allow investors to assess the situation.
Second-Hour Trading Suspension
In the second hour of trading, specifically at 1 pm, if the NEPSE index fluctuates by 5%, trading is halted again. This time, the suspension lasts for 40 minutes. The second circuit breaker provides an extended period for market participants to digest information and make informed decisions.
Full-Day Trading Suspension
Should the market index fall by 6% at any point during the trading day, all remaining transactions for the day are stopped. This final circuit breaker serves as a safeguard against extreme market volatility and provides time for regulators to evaluate the situation thoroughly.
Fluctuation | Time | Duration |
Increase or decrease by 4% | 20 minutes before 12 noon | 20 minutes |
Increase or decrease by 5% | 40 minutes before 1:00 p.m. | 40 minutes |
Increase or decrease by 6% | A full day before 3:00 p.m. | Throughout the day |
Significance of Circuit Breaker in NEPSE
The implementation of circuit breakers in NEPSE serves several crucial purposes:
- Market Stability: Circuit breakers help maintain stability by preventing panic selling or buying during periods of rapid price movements.
- Informed Decision-Making: By pausing trading, circuit breakers allow investors to analyze market events, news, and announcements carefully, allowing for more rational decision-making.
Implementation of Index-Based Circuit Breaker in NEPSE
NEPSE introduced index-based circuit breakers on September 21, 2007. Unlike circuit breakers triggered by individual stocks, index-based circuit breakers are activated based on fluctuations in the overall market index. This approach ensures that market-wide movements are addressed promptly, promoting overall stability.
Circuit for Stock in NEPSE
Apart from market-level circuit breakers, NEPSE also employs circuit-level trading for individual stocks. When the price of a particular company’s stock increases or decreases by 10% in a single trading day, circuit-level trading is activated. For instance, if the price of XYZ scrip jumps by 10%, it hits a positive circuit, while a 10% decline triggers a negative circuit.
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Conclusion
Circuit breakers play a vital role in maintaining order and stability in the Nepal Stock Exchange. By temporarily halting trading during periods of extreme volatility, these mechanisms provide breathing room for investors to assess market conditions and make informed decisions, ultimately contributing to a healthier and more resilient stock market.
FAQs
- Are circuit breakers common in stock exchanges worldwide?
- Yes, many stock exchanges globally employ circuit breakers as a risk management tool to prevent excessive volatility.
- Can circuit breakers eliminate market crashes?
- While circuit breakers can mitigate the impact of sudden market movements, they cannot eliminate the possibility of market crashes.
- Do circuit breakers apply to all securities traded on NEPSE?
- Circuit breakers primarily apply to the NEPSE index and are triggered based on its fluctuations. However, individual stocks also have their circuit-level trading mechanisms.
- How do investors benefit from circuit breakers?
- Circuit breakers provide investors with a temporary pause in trading, allowing them to assess market conditions and make rational decisions without succumbing to panic selling or buying.
- Are there any drawbacks to circuit breakers?
- While circuit breakers serve a crucial role in maintaining market stability, some critics argue that they can also impede price discovery and exacerbate liquidity issues during periods of extreme volatility.