Stock markets go up and down due to their very nature. Often, these movements can be confusing for new investors, making them unsure about when to invest, and when to withdraw their investments. However, it is possible to skilfully navigate such situations and ease your worries by understanding the difference between a stock market correction and a crash. The knowledge will make you more confident about your investments and help you decide the best way forward when the occasionally significant dip in the market occurs.
What does a stock market correction look like?
A stock market correction is a gradual 10 percent decline in the market that happens over a week. This is usually after the market experiences a high for weeks or months. The stock market correction is often perceived as a good measure to stabilise the market before it can rise again. It prevents the stocks from getting overpriced. This correction is usually short-lived as the market recovers itself in the next 3-4 months.
How can you protect your investment from a stock market correction?
A correction will not cause much damage to your investments, and the loss may be temporary. Here are a few things that you can do to make the most of the stock market correction:
The stock market experiences a 5 -10 percent correction multiple times in a year. You can look for patterns and wait for the next one. Use some of your profits from other holdings as this may also be a good time to invest. A correction is usually short-lived and leads to growth in the stock market.
Build a diverse portfolio
One of the ways to survive the uncertainty of the market is by building a diverse portfolio. Invest in different industries and make sure your holdings include bonds, too.
When a market correction occurs, it can create panic. Limit your exposure to repeated news of the same market correction to avoid getting overwhelmed. If you have been studying the market for a while, you will know that this wave will pass, too. Use this time to plan or make investments.
What does a stock market crash look like?
A stock market crash is sudden and may cause significant losses. It is a steep drop in the stock prices, usually 10 percent in a day. In such a scenario, investors look for other options that seem more secure and less volatile.
While it is only natural to feel afraid, it is essential to note that this sudden crash of the market is not a frequent event. In fact, it occurs once in as many as 7-10 years after the market has seen an upward trend for a long time.
The difference between a stock market correction and a crashis that a correction is gradual and causes a 5-10 percent low, whereas a crash is sudden and can range from 10-20 percent.
What causes the stock market to crash?
It is a sign that most investors are currently looking to sell their stock as opposed to investing in the market. A rumour, government policy changes, a natural disaster, or any other significant event can contribute towards a stock market crash.
While it appears suddenly, a few people may be able to spot the signs early on. Working with a financial planner can help since they have the tools and information required to study the market in depth.
What happens to your investments when the stock market crashes?
Depending on the holdings in your portfolio, the stock market crash can affect different people differently. As opposed to a correction, a stock market crash can take longer to recover. Having a diversified portfolio is vital, as the economy recovers from the crash, some of your holdings may recover sooner than the others. At the same time, some may not be as severely affected.
What to do in case of a stock market crash?
A lot of the stock market crash is driven by fear and panic. People worry and are quick to sell their investments. While it may take time, the markets will recover, since no crash is permanent. If you decide to stay put, as the market regains stability, some of your investments may earn you a profit.
Study the market, look at the trends, identify the industries that are likely to be affected by the changes. You can use this opportunity to invest in areas that are likely to recover faster. When the market rises again, these investments can give you a neat profit.
While the stock market’s highs and lows can cause one to make emotionally charged decisions, it is essential to analyse the risks involved. You need to be aware and make sure you can get yourself through the bad times and the market lows while you wait for the highs again.
With more information about the stock market correction vs crash, you should be able to invest wisely. Making long terms investments in the market will pay off in the long run; hence, try to respond instead of reacting to a market correction or crash.
Seek assistance from a professional to help you diversify your investments so you can meet your financial goals.