What Is a Market Correction?

What Is a Market Correction?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A market correction refers to a decline in prices of at least 10% from the most recent high point in any asset class or market index. It’s often seen as a pause or pullback during a continued upward trend, and it’s considered a healthy way for the market to consolidate before resuming a positive move.

Market corrections are usually short-lived and typically last less than two months. They’re considered essential to prevent a potentially dangerous bubble environment where prices continuously increase and disconnect from their true underlying value. Market corrections provide investors an opportunity to buy stocks at lower, more attractive prices, which can ultimately lead to better investment returns.

Related Questions

1. How often do market corrections occur?

Market corrections aren’t rare events and tend to happen most years. The exact frequency of market corrections can vary greatly, depending on market conditions and economic factors.

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2. What causes a market correction?

Several factors can lead to a market correction, including changes in economic indicators, investor sentiment, geopolitical events, or financial crises. The trigger for each market correction will be different.

3. How can investors handle market corrections?

During a market correction, investors are advised not to panic. Corrections are often followed by an upward trend, and panic selling can result in selling investments at a low price. It’s a good time for investors to reassess their portfolios and possibly buy stocks at lower prices.

4. Are market corrections predictable?

Market corrections are not predictable. While economists and financial analysts may identify potential indicators of a correction, it’s impossible to predict with certainty when a correction will occur and how severe it will be.

5. What’s the difference between a market correction and a bear market?

A market correction becomes a bear market when the prices drop by more than 20% from their highs. Bear markets typically last longer than corrections and can cause significant value losses for investors.