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.
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