How do circuit breakers protect investors?

In electronics, a circuit breaker is a safety device designed to prevent damage by interrupting the flow of electricity whenever there's an overload. It trips to break the circuit and protect the system from harm. Similarly, circuit breakers in stock markets act as automatic trading halts triggered when there's excessive buying or selling activity. If the market moves beyond a certain threshold - whether sharply up or down - trading is temporarily paused or even halted for the day. While these two types of circuit breakers operate differently, they share a common goal: protecting the system. In the market, circuit breakers help shield investors from drastic losses by curbing panic-driven selling and extreme volatility within a single trading day. In this article, we'll explore how these mechanisms work, their benefits, and their limitations. What are circuit breakers in the stock market? Circuit breakers are automatic trading halts that kick in when prices of stocks or stock indices rise or fall beyond certain predefined thresholds within a trading day. The primary goal is to temper extreme volatility and give market participants time to reassess market conditions, preventing knee-jerk reactions. The concept was introduced globally after the Black Monday crash in 1987, where the Dow Jones Industrial Average fell more than 20 per cent in a single day. Since then, circuit breakers have become standard features in stock markets worldwide,

This article was originally published on May 22, 2025.