A market correction is usually a sudden temporary decline in stock or bond prices after a period of market strength. A 10% movement on the downside that lasts no longer than six months is a normal correction. It is reverse movement, usually downward, in the price of an individual stock, bond, commodity, or index. If prices has been rising on the market as a whole, and then falls dramatically, this is known as a correction.
Why should I be aware of this?
We need to be prepared to handle the risk our investments face when the market correction takes place.
As markets are unpredictable it is important to know ahead of time how much risk you can tolerate and model your portfolio to match that taste for risk. We tend to lose our judgment and make wrong decisions when we take on too much risk. We should not resort to panic selling as we may this way throw away years of gains during one moment of desperate action.
All about market correction
Market sentiments, such as decrease in interest rates, good rainfall, play an increasingly important role in the fixing of share prices. But bad news such as bomb blasts lower the indices.
Investors often form consortiums among themselves which give them the power to make changes in the overall market indices. When they think that profits should be made they take up a selling position. As a result the market falls. When the market falls these groups again buy the shares; thus making profits again out of their buying back the shares.
It is normal for markets to go up and down. If it did not behave in this way and rose in a straignt line, the shrewd investors will not get much opportunity to get ahead of others.
- The Wall Street Crash of 1929, which led to the Great Depression that lasted from October 1929 to the mid-1930s was the most famous market correction
- The Black Monday crash of 1987 was a sharp, dramatic correction within a trend of rising valuations.
- The October 1997 minicrash was a more minor revaluation that again occurred within an upward trend.
- The correction that occurred after 9/11 was short and sharp, but later led to the stock market downturn of 2002 as various accounting scandals, including Enron, spread fear