You may have often come across investors panicking about market corrections and getting into panic selling. So, what is a stock market correction? The thumb rule for a fall in stock prices to be defined as a stock market correction is when the prices fall by about 10% from their recent highs.
A market correction occurs when it finds the real value or price level for a stock stripping away the hysteria or excitement.
A market correction can happen to the prices of assets or indices or even entire markets of particular securities. They usually do not last beyond a few months. Anything more sustained than that risks falling into a bear or a bull market. But a correction is by no means an indicator of a subsequent recessionary phase. There are many instances where markets have returned for a bull run after correction.
In India, for example, between January and March 2020 the NIFTY underwent a correction by 28 percent, something that has happened only six times since 2000.
Factors That Trigger A Stock Market correction
Any development that forces investors to start selling stocks in large numbers will trigger a correction like global economic changes, rising inflation, slow-down in economic growth or even fear or panic selling. For example, political development could create anxiety among investors, and they may react emotionally by dumping stocks. When a critical mass of investors has sold off, it creates a spiralling effect, and more investors get into sell-off mode. Global triggers like a collapse in crude oil prices, war, sanctions or acts of terrorism or pandemics can all lead to panic selling.
How to Face a Market Correction
First of all, it is essential to know the difference between correction in the stock indices and correction of individual stocks. When the stock indices, a collective of market-leading shares, undergo a correction, it does not necessarily mean prices of stocks you own have corrected as much. Some stocks may show a rise in prices. Unless you own shares of the indices, you may find the prices of stocks you own may correct by a lesser or greater value than the correction in the index.
If you in it for the long haul, then you must know a correction, bear and bull market, down turn-they are all part of the market cycles. And markets have a way of averaging out over the long term. Also, if you are a long term investor, you may choose not to participate in panic selling. Someone who sold stocks out of panic may later find out the value of the stock has gone up again. For some investors, it may be an excellent time to go long since correction presents buying opportunities. Though, it is equally important to pick stocks that you have the potential to rise again in value after the temporary correction. Otherwise, you may be saddled with non-performing stocks.
Also, it helps to diversify your portfolio to avoid your investments getting wiped out as a result of sudden market corrections. You can also add in some other securities like bonds and futures in your portfolio to hedge correctional risks in your portfolio.