Here is a research I have done on market corrections. Each time we face a correction we lose our balance of mind and think that the correction will go much deeper. Our thoughts are supported by the negative news in media who are busy giving lower and lower support levels for Nifty or Sensex.
Stock market corrections, Financial planning and investments, Equity investment
What is a market correction?
Stock market corrections are the ones in which the prices of the stock or index falls for at least 10 percent or more from its recent high. Corrections happen just to fix the overvaluation of stocks or indices. Market corrections happen often and it is good for both the market and the investors. Markets remain stable in a long-run and there could be high volatilities in a short-run. Market corrections are the perfect time to invest in high-value stocks at discounted prices.
How long does stock market correction last?
Stock market corrections are temporary, it is said to last for a period of 14 weeks, roughly around three to four months. For example, there have been 36 corrections in the US markets from the year 1980-2018. Most of these corrections resulted in bear markets, which indicates an economic downturn. A bull market indicates economic growth and stability.
When do corrections happen?
There is no way an investor can predict or stop corrections in the stock markets. It is unavoidable and nobody can predict the cause of a correction.
Investing in stocks during market corrections
Corrections usually affect the short-term traders in the market. Traders who leverage on short-term investments and who use margins are the ones who are heavily affected by market corrections. For long-term investors, corrections have almost no impact.
Stock market corrections are the best time to invest in high-value stocks. As the prices come down, you can include these stocks to your portfolio.
What should you do during market corrections?
During market corrections, the best thing to do is not to panic. Know your risk and keep your losses small. It is also the best time to buy when others are selling. Be patient and keep your risks minimum.
Keep an eye and be prepared:
Allocate your funds for long-term investments. The best time to buy shares is during corrections. So be prepared for it. Plan for investing in specific stocks during corrections.
Have a diversified portfolio:
Do not depend on only one type of stock or investment. Diversify your portfolio by not concentrating on one type of asset class.
Market crash Vs. correction
A market crash is usually 20 to 40 percent fall in the stock prices and indices. It is fairly longer than a correction, could last up to 3 years. There is no way in which you can predict a correction or a crash. There was a market crash in the year 2008-09 due to the sub-prime crisis in the US and a subsequent global financial crisis. In the year 2000-02, the markets across the world had slumps post the September 11 attacks.