Circuit breakers in the stock market are protective measures designed to temporarily halt trading when prices move too sharply in a short period of time. Their main purpose is to prevent panic selling, reduce extreme volatility, and give investors a chance to assess information before making decisions. These mechanisms were first introduced after the market crash of 1987, when the Dow Jones Industrial Average fell dramatically in a single day.

Circuit breakers apply at both the index and individual stock levels. For major indices such as the S&P 500, the rules are structured in levels. A Level 1 halt, triggered by a 7% decline from the previous day’s closing price, pauses trading for 15 minutes. A Level 2 halt, at a 13% drop, also stops trading for 15 minutes. A Level 3 halt, triggered by a 20% decline, suspends trading for the rest of the day.

Individual stocks may also face circuit breakers if their price fluctuates too widely within a short time. These rules are especially important in protecting retail investors, who might otherwise be caught in sudden swings caused by large institutional orders or algorithmic trading.

Overall, circuit breakers provide a safeguard against uncontrolled market crashes, encouraging orderly trading and maintaining confidence in financial markets.