A person who is interested in finance, business or investing in the stock markets may want to know, “What is a stock market correction?” This terminology refers to a sudden drop by at least 10 percent of the value of an individual stock or of the market as a whole. It can cause a sudden jolt to investors, and understanding what it is and why it happens is essential to hedging losses and avoiding making an investment at the wrong time.
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What Corrections Are
A correction of stock markets is usually defined by finance analysts as a decline of at least 10 percent from a stock’s, market’s or exchange’s peak value. These technical corrections occur when the stock or market is overinflated. The drop happens in a short period of time. For example, a market correction could lead to a 12 percent drop in a stock’s value in one day of trading.
How Long Corrections Last
The length of a correction varies, and the duration is difficult to predict. A correction sometimes only lasts for a few hours. If the dip triggers demand to go up, investors might start buying and driving the price closer to where it was before the correction. It is more typical for a correction to last for several days to several weeks. In the event of a correction to a whole index or market, the duration typically lasts longer. Those corrections could go on for months as investors and conditions settle and analysts consider the reasons for what took place.
Which Investments Are Affected By Corrections
Any type of investment can be affected by a market correction. It can happen to an individual stock or asset. It can also happen to an index, commodity, currency market or an entire exchange. When an individual stock or asset experiences a correction, it is often the result of a specific action taken by the company or news reported by the company. When an index, market or exchange has a correction, the cause is more likely to be a larger economic factor, such as a macroeconomic shift.
Preparing for and Reacting to a Correction
A correction of an individual stock or a whole market does not have to instill fear. According to Investopedia, the damage might look bad in the initial aftermath. However, the adjustment of values to healthy prices could actually be good overall for the company or the exchange as a whole. Analysts can sometimes predict them based on resistance levels in their peak values. When a correction does occur, investors should think of it as an opportunity. It is a chance to buy at a discount. Stop loss orders, stop limit orders and diversification of investments are a few of the tools that investors can use in order to protect themselves instead of having an emotional reaction when a correction occurs.
Understanding stock market corrections helps a person be a more informed investor. It also helps with the understanding of how markets behave over time and what happens when values get too high too quickly. Being able to answer, “What is a stock market correction?” helps a person know how to manage their investments and makes it easier to look at the long-term picture of investing in the stock markets.
