All You Need to Know about Market Correction


It is very pleasing to watch all those green arrows always going up and never coming down and turning to red. Although it may give us a lot of pleasure to watch that colour green, neither it is possible nor advantageous for these arrows to always remain green. They must turn red from time to time to restore the balance.

Here comes the concept of market correction. Market correction means when prices of stocks fall more than 10%, from their most recent peak, but less than 20% over the course of a few days, weeks or months. But it is different from a crash. Crash means a sudden fall in prices while in a correction the prices fall gradually over a comparatively longer period. And when the fall is 20% or more it is classified as bear market.

But you must be wondering why is this fall necessary?

When stock market is rising, it is an indicator of overall economic boom and may also lead to inflation. It also leads to securities rising above their intrinsic value. Market correction helps to bring down the securities back to their intrinsic values. Let us understand this by the way of an example. At times when the prices of onions rise above their normal values due to forces of demand and supply, people reduce the demand for onions which brings the prices back to normal.

Now the question arises can you figure out when the next market correction will occur? Given the unpredictable nature of stock markets and numerous reasons due to which corrections may happen, the answer is NO.

People often panic during market correction and try to move money during corrections to profit from them. But instead of making money they often end up losing it. My advice is instead of panicking and trying to avoid corrections it is best to ride through them as in the long term market will return to normal levels. But also try to find the reason for the correction and take action accordingly. Take into account the reason for which you purchased the stock and see if that reason still holds good after the correction. It may help you decide whether to hold the stock or to sell it.

While market corrections are a pain for some people they may be a blessing for others. This is due to the fact that you can buy good stocks at a bargain. You may even manage to find stocks of companies at less than their intrinsic values if you are lucky and look hard enough.

So to conclude are market corrections necessary- Yes; do they happen often- Yes; Can you figure out when the next correction will happen- No; Is a market correction coming soon- Maybe, you never know.


 

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