Many times, people from the outside tend to believe a stock market is a one-stop place for a continual amassing of wealth. But this isn’t always the case. Until you become part of it, the stock market isn’t always rosy. Unless you have strong emotional health, Stock market correction can be alarming.
But when this happens, a piece of advice: Don’t Panic.
What is a stock market correction?
No one likes to hear the term Stock Market Correction. Why, because investors always want to see the values of their investments soar high continuously. But stock market corrections are a common occurrence.
The Cambridge Dictionary defines correction as a change made to something to improve or correct it. But, what does this mean to stock investors? Investopedia defines Correction as a decline of 10% or more in the price of a security from its recent peak.
When markets fall at least 10% from their recent high or over a short period, it is a Market Correction. Interestingly, this is strange especially when correction means something was wrong and now turned right.
It is less severe than a Bear market though where stocks decline by 20% or a Crash where stocks decline further above 20%. Corrections are an unavoidable part of stock investing and there’s nothing you can do from stopping it from happening. Terrified? remember, don’t panic. Why? Because corrections always are a normal and healthy part of the stock market cycle and eventually, it will recover.
How does a Stock market correction happen?
With people making a lot of money in the stock market, it draws a lot more people into the market. This means that the more active investors, the higher the chance of a Stock market correction occurring. Statically, the large players (Corporations, Banks, and Institutions) occupy a large percentage of the stock market.
They are termed Large because their activities in the stock market influence to an extent, the waves of stocks. Hence, it will only take a few large players’ actions to impact a stock market correction. Large players who often are investing in other people’s money could make a sell decision for the market to see downward pressure.
Additionally, selling for large players can lead to Herding (like a pack of learnings). And since a lot of investors copy the actions of others, the decision of large companies can have a profound impact. How? if other investors tend to copy their first activity which is to sell. That is when a correction occurs.
Large players notice high valuations and start to sell their positions, it can trigger a sell from other investors. Because for them, if they sell, we sell. In summary, Stock market corrections happen because investors sell more than they buy.
Also read: How to Measure Your Trading Performance
How long does Stock market correction last?
Historical and statistically, a Correction is very short in duration. It tends to recover quickly. It could be days, weeks, months, or even longer. According to a CNBC report for 2018, the S&P 500 lasted just four months that saw values decline by about 13% before recovering. Nevertheless, the average stock market correction is momentary, lasting at least four months or less.
Historical review of Stock Market Corrections
The S&P 500 has experienced 5 stock market corrections from 1990 – 2000 and, 4 from 2000 – 2017. The last two corrections occurred in 2018, once in February and again in October. During these periods, there was a 15.6% fall of the S&P 500. Overall, from 1980 – 2018, the U.S stock market has experienced 37 Stock market corrections
What happens next after a correction?
The stock market corrections indeed last for a while, but what happens after? How impactful are the recoveries?
When a Stock market correction recovers, it could either lead to a Bear market or a Bull market. A Bear market indicates an economic downturn. A Bull market, on the other hand, interprets economic growth and stability.
Of the 37 Stock market corrections experienced by the U.S stock market, ten led to a Bear market while others resulted in a Bull market.
For example, in February 2018, Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500) experienced corrections. The two major indexes dropped by more than 10%. Nasdaq and the S&P 500 on the other hand also experienced stock market corrections in October that same year.
At each correction, the markets bounced back. Another correction took place on Dec. 17, that same year, with an over 10% reduction of both DJIA and S&P 50. S&P 500 declined 15% from its all-time high.
Declines continued into early January of 2019. Soon, the markets began to rally, and by the end of January, all the year’s losses had been erased. By April 2019, the S&P 500 boomed up 20% leaving behind the dark days of December of 2018.
Staying rational during a stock market correction
When a correction occurs, it forces the value of stocks to go down and fear, worry, and anxiety come in. When this occurs, you should stick to your investment strategy and not allow your emotions to get the best of you. You may feel the desire to sell in the fall, especially right after a correction, but never time the market.
Timing the stock market correction is a dangerous game. Rather, understanding what causes the correction will help steady your hands to any future downtrends. If the volatility of the market is gaining to you, remember that market could recover from corrections shortly after occurrence.
Stock market correction doesn’t necessarily mean you should sell all your stocks, contrarily, it could present an opportunity to buy.
Also read: Swing Trading vs. Day Trading: What’s the Difference?
Staying rational during a stock market correction
When a correction occurs, it forces the value of stocks to go down and fear, worry, and anxiety come in. When this occurs, you should stick to your investment strategy and not allow your emotions to get the best of you. You may feel the desire to sell in the fall, especially right after a correction, but never time the market.
Timing the stock market correction is a dangerous game. Rather, understanding what causes the correction will help steady your hands to any future downtrends. If the volatility of the market is gaining to you, remember that market could recover from corrections shortly after occurrence.
Stock market correction doesn’t necessarily mean you should sell all your stocks, contrarily, it could present an opportunity to buy.
Also read: Swing Trading vs. Day Trading: What’s the Difference?
8 key facts about a stock market correction
These 8 important points would help prepare you for a possible stock market correction.
- It is a common thing – being aware of this would help your risk tolerance.
- They are usually emotionally driven – It typically follows an increase in value. When you contemplate price rise, there’s an expectation of supposed gains. This thus propels you to buy more stocks with the hope of making more money. Interestingly, others do the same because this anticipation has caused others to key to the trend.
- Stock market corrections don’t last long – always know that it would pass in no time.
- Predicting stock market corrections is difficult – Which makes timing the market a bad idea.
- Causes of corrections are known only after a market drops – A lot of factors could be responsible for the fall of stock market prices. A failing economy, the investors’ perception, and emotional response, or the fear of losing out.
- Stock market corrections, in the long run, are not impactful – You could feel down during a correction, but don’t panic rather forge ahead on your financial journey. It will have little impact on your long-term investments. For long-term investments, a correction presents an opportunity to reassess your portfolio and review each of your investments. reexamine the reason why you purchased the stock. If it’s still valid then, it is best you hold on else, sell if that would be beneficial.
- When a stock market correction happens, invest. – Surprised? Don’t be. The reduction of price in a correction can present a good chance to add investments from top companies. Since prices could rise back up after a correction, it is best to prepare to take advantage. To do this, learn more about the high-quality companies you might want to purchase their stocks. So, during the correction, load up at a lesser price
- During stock market corrections, dividends and value stocks should be your best buy – A correction presents an excellent time to seek out the best value stocks. Look out for the ones with a history of strong earnings and solid down sheets.
Summary
During the period of a Stock market correction, it is important to remember not to panic. This can’t be overemphasized. The best investment plans are crafted to tolerate market instability and perform according to your portfolio risk level. Most importantly, having a financial advisor can be helpful, to help and guide you during this phase
