What is Correction?
10% or greater decline in prices for an asset following a peak. To prevent overvaluations of stock, corrections occur when individual assets within an asset class are regulated down to similar prices. Can occur as free-market custom and in commodities such as gold or silver.
A correction is as much a part of a market lifecycle as bear and bull markets. A correction can occur over a few days or for a longer period of time. Generally speaking, a correction lasts about three to four months on average. While a correction may sound scary, this market condition occurs on a fairly regular basis. It can be challenging to determine when a correction will occur, though financial institutions and analysts use charting methodology in an attempt to predict and track market corrections. Some financial organizations assert that corrections can occur once a year.
There are several conditions that can lead to a market correction including financial practices of a large multinational company to shifts in the housing markets. Market Corrections can be a precursor to a bear market, which occurs when there is a sustained downturn in the market, and stock prices drop by at least 20 percent. The two largest corrections that led to bear markets in the last 10 years was in 2000 during the dot-com bust, and then again in 2007 triggered by the housing financial crisis.
Market corrections cause the most damage to day traders or those who have overleveraged their accounts by borrowing more money than they have to buy stock shares. For traders focused on long term investment strategies, a correction can be a helpful force by regulating the price of assets and stocks. This means investors can take advantage of lower prices in the market. Ultimately, a market correction can present opportunities to diversify an investment portfolio.
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