Market Correction Definition

The most widely accepted market correction definition is a decline of 10 percent or more from an asset or index’s most recent high. Market corrections can be scary for both experienced and novice investors. We’ll help you understand what market corrections are and how to prepare for corrections in the future.

Market Correction Examples

Examples of market corrections sometimes help people better understand corrections. One example is a common stock that recently reached an all-time high of $1000 per share. In this case, a correction would occur if the price of the stock fell to $900 per share or lower. Market corrections can happen in any type of financial asset, including securities and bonds.

What Causes Market Corrections?

A market correction business definition implies that there are more sellers than buyers for a significant number of stocks for a longer than usual period of time. Sometimes, this shift occurs because of fear, greed, or supply chain issues. It can also happen because of a major crisis in one particular industry, like the dot-com industry in the late-1990s and early 2000s.

How Long Do Market Corrections Last?

Since the 1950s, most market corrections have taken about four months to return to their former highs. Each one has been different, with some lasting longer than two years, and others as short as three weeks. 

Once the event that is the definition of the market correction runs its course, markets generally recover. In fact, markets often continue heading higher. However, since the mid-1970s, five market corrections have turned into bear markets.

Market Correction vs. Bear Market

While the market correction definition is a decline in an asset’s value of 10 percent or more from its high, the bear market definition is more drastic. A bear market is a decline of 20 percent or more from an asset or index’s high. 

In the event that a market correction comes before a bear market, it is usually caused by a major outside economic event. These include geopolitical crises, economic slowdown, or market bubbles bursting.

Preparing for a Market Correction

Don’t let potential market correction disadvantages rattle you or your business. Some ways you can prepare yourself for a market correction include:

• Crafting a written financial plan
• Reviewing your risk tolerance 
• Rebalancing your portfolio as necessary 
• Discussing your concerns with your licensed broker

While all investing comes with risk, a solidly balanced portfolio can help protect you and your business against major market events. Market corrections are a regular part of investing. They can be scary for new investors, but knowing what to expect can make them easier to navigate.

Summary

A market correction is a dip of more than 10 percent from an asset’s highest price. Market corrections can be a natural response to a global event, or rarely, a precursor to a bear market. Because market corrections are not accurate predictors of bear markets, it is important to have a balanced portfolio.

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