Market Correction: McBillion Explains
By R. Nelson Molina, MD.
A Market correction means something is getting "fixed" on Wall Street, correction it's a popular word used to describe both a trigger for financial losses, as well as buying opportunities for investors.
So what is a correction? How does one come about? What does it mean for the stock market?
A correction is a decline or downward movement of a stock, or a bond, or a commodity or market index.The amount of the decline is at least 10 to 15 % and a true correction exceeds that amount. In short, corrections are price declines that stop an upward trend.Why do corrections happen?Stocks, bonds, commodities, and everything else traded on the markets never move in a straight line, either up or down. At some point their value will change—for better or worse.When stock or bond prices go up, it may seem like there's no end to how high they can go. When this happens, stocks or bonds become 'overbought.' That means some investors will try to buy into the rise of stock prices with the hope of making profits before a downward trend begins.
How long do corrections last?
Corrections generally last 2 months or less. They usually end when the price of a stock or a bond 'bottoms out'—for example, some will point to a stock reaching a 52-week low—and investors start buying again.
How is a correction different from a bear market or "capitulation"?
A correction is shorter in length and generally less damaging to investors than a bear market. A bear market happens when equity prices keep falling and investors keep selling into a downturn of 20 percent or more for the overall market.
The difference between a capitulation and correction is simply that a capitulation is more severe. A capitulation, is said to occur when investors try to get out of the stock market as quickly as possible. It's also described as panic selling. Capitulation usually is based on investor fears that stock prices will plunge even further than the current low levels.
A fact is bottoms—or the lowest price for a stock or market index—are formed more quickly in corrections than in capitulations.