January 25, 2022 Breaking News, Latest News, and Videos

What is a Market Correction? The Basics

Often, it feels like learning how to take advantage of your finances begins with learning a new language. There are so many different terms to discover in this world, from mutual funds, to ETFs, it’s no wonder beginners frequently end up overwhelmed. And there are a few areas where you do not have to sacrifice quality to save money, with the right know how, this can be one of them.

One of the most commonly cited complex parts of the trading environment, is the term market correction. This is something that’s likely to appear pretty frequently in your trading and investment life, so it’s worth getting to grips with it as quickly as possible. Today, we’re going to define this term for you, and help you prepare for when you encounter it yourself. 

Defining the Market Correction

A correction is simply a moderate decline in the value of a market index or individual asset. Usually, corrections are about 10 to 20% of a drop in value from a more recent peak in the cost of the equity you purchase. A correction can happen in a range of different environments, from within the shares of your favorite gaming company, to the S&P 500. Though this term appears quite frequently in the investing and trading space, many investors respond to it as though it means the same thing as a bear market or stock crash. When a correction happens, you may see a number of investors panicking they’re going to lose all of their money because of a sudden drop in value.

However, the truth is stock market corrections happen all the time, and they’re rarely as life altering as some people would think. Rather, you’ll usually find you can withstand these corrections provided you have the right diversification strategy in place. You may even find you can handle market corrections as a day trader. Most of the time, market corrections don’t have much of an impact on day traders, beyond providing them with additional opportunities. This is because corrections actually deliver volatility in the market, characterized by wider price fluctuations and heavier trading. You can learn more about the unique considerations for day traders by reading this market guide on day trading that you can utilize.

Dealing with the Ups and Downs of Trading

There are many different components to trading today’s stock market enthusiasts need to be aware of, corrections are just one of them. Typically, the US market will enter a state of correction when an economic shock or major event in society prompts investors to stop, take a step back, and consider what’s going on in the world at large. The good news for those who feel panicked by the concept, is corrections are usually short-term changes which last for just a few weeks or months. 

Ultimately, there’s no guarantee of how long one of these corrections will last, but the more time you spend in the market, practicing your skills, the more comfortable you’ll feel with the concept overall. It’s very rare for a correction to suddenly turn into a bear market – although it does happen. Fortunately, you should be able to protect against this issue by simply taking the time to practice pinpointing red flags in your chosen market.

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