A reverse shift, generally negative, of at least 10% in a stock, bond, commodity or index to adapt for an overvaluation.
Corrections are normally short-term price reduction interrupting an uptrend in the market or an asset. A correction has a shorter period than a bear market or a recession, but it could be a forerunner to either.
A stock market correction is a normal portion of the stock market cycle. Every bull market in the last four decades has witnessed a correction. In fact, knowledgeable investors often want a correction to enable the market to stabilize before moving upwards.
A stock market correction could be produced by some type of event that generates anxiety and consequent panicked selling. It could be a very difficult time, and several new investors would want to be part of the move to exit the markets.
However, that would not be the right move because the stock market normally makes up the losses in a short period. Therefore, if an investor is going to sell during the correction, the investor would mostly not be able to buy in time to make up the losses.
Corrections are unavoidable. When the stock market is rising, investors would like to make an entry on the possible profits. This can lead to unreasonable eagerness.
A correction is not similar to a stock market fall, which is when stock prices fall by over 10% in a single trading day. Crashes are so disheartening; they normally result in a bear market.
Dissimilar to a correction, a stock market fall could result in a recession. It is not easy to differentiate between a correction and a crash. A correction would become a crash if the stock market reduces by over 10%. The process of deciding if a correction is turning into a crash is called as “timing the market”.
This is almost not possible to do. There are several factors that can impact the market’s movement. Hence, it would be appropriate to have a diversified portfolio with an optimal mix of stocks, bond, and commodities.
An investor would profit from market upswings through the stocks, and be safeguarded from stock market correction through the bonds and commodities. Diversification would enable an investor to ride out any stock market corrections.