What Is a Correction?

In this series, we demystify investing terms for beginners.

Previously, we explored what total return is all about.

Now, let’s find out what a correction means, shall we?

A correction usually refers to a fall of at least 10% in the price of a stock (or stock market) from its most recent high. 

A correction is different from a bear market as the latter is defined as a fall of 20% or more from a stock market’s most recent high.

Corrections and bear markets may sound scary, but we shouldn’t fear them as they are common features of a healthy stock market. They are usually short-lived as well.

According to Fidelity, since 1920, the US’ S&P 500 index has experienced on average a pullback (defined as a brief 5% reversal in the price of an asset) thrice a year, a correction once a year, and a bear market every three years.

For those with a long-term view of the stock market, corrections and bear markets provide great opportunities to buy shares in wonderful companies at lower valuations.

Have Burning Questions Surrounding The Stock Market?

Why not check out Seedly’s QnA and participate in the lively discussion regarding stocks!