Circuit Breaker, defined

The stock market version of a chill pill

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๐ŸŒฐ In a nutshell: When the stock market is going crazy, a circuit breaker gives it a timeout.

๐Ÿ“ฆ Unpack that a bit: If the market drops by a substantial amount in a single day โ€” 7% from the prior dayโ€™s closing price for the S&P 500 โ€” trading is automatically stopped for 15 minutes. The specifics of how big a drop triggers how long a timeout can be quite detailed.  The idea is to give everyone a chance to take a deep breath, reflect on the situation, and hopefully stop any panicked selling.

๐Ÿ‘ถ Tell a toddler: โ€œWhen you get upset and I call a timeout, itโ€™s so we can all calm down. Sometimes the stock market needs that, too.โ€ 

๐Ÿ’ฌ In a sentence: โ€œThe circuit breakers were adopted in the wake of the Black Monday crash of Oct. 19, 1987, when the Dow plunged 508 points, or 22%.โ€ – NPR

๐Ÿ‘Š Why circuit breakers matter:

Stock markets are built to be responsive. Sometimes, they appear to be too responsive.

๐Ÿ– The other hand: โ€œSome academics say circuit breakers actually exacerbate selloffs because investors may see the market approaching a halt and sell in a panic to exit trades before the level is reached,โ€ according to The Wall Street Journal. You know how telling someone to โ€œjust relax!โ€ rarely works? Like that.

๐Ÿ”€ See also: Stock Market, S&P 500