What is Correction in Share Market?

Investors panicking about market corrections can often be seen and panic selling may have been a common practice. What is a stock market correction? A stock market correction can be described as a 10% drop in stock prices from their most recent highs.

Market correction is when the stock's real value or price level is found, without any excitement or hysteria.

Market corrections can occur to assets, indices, or entire markets for particular securities. They rarely last more than a few months. Any longer than that could lead to a bear market or bull market. A correction is not a sign of a recessionary phase. Many times, markets have rebounded from a correction to resume a bull run.

For example, in India, the NIFTY was corrected by 28 percent between January 2020 and March 2020. This is a rare event that has occurred six times since 2000.

Factors that Trigger a Stock Market Correction

Investors will be forced to sell stocks in large numbers if there is a significant economic change, such as rising inflation, slowing economic growth, fear selling, or any other type of correction. Investors may feel anxious about political developments, and decide to dump stocks. A critical mass of investors selling off can cause a spiral effect that leads to more investors going into sell-off mode. Panic selling can be caused by global triggers such as a drop in crude oil prices, wars, sanctions, acts of terrorism, or pandemics.

How To Face a Market Correction

It is important to understand the differences between corrections in stock indices or corrections of individual stocks. Stock indices are a group of market-leading shares. However, this does not necessarily mean that prices for stocks you own have fallen as much. There may be a rise in the prices of some stocks. If you do not own shares in the indices you might find that the correction in the index may have a greater or lesser effect on the stock prices.

If you are in it for the long-term, you need to be able to recognize that corrections, bull and bear markets, as well as downturns, are all part market cycles. Markets have a tendency to average out over the long-term. If you are a long-term investor, panic selling may not be a good idea. Stocks that were sold in panic might be repurchased later. It may be a good time to buy stocks, as corrections can present buying opportunities for some investors. It is important to choose stocks that have the potential for a rebound in value after the temporary correction. You could end up with non-performing stock portfolios.

Conclusion

It is also a good idea to diversify your portfolio in order to prevent your investments from being wiped out by sudden market corrections. To hedge against correctional risks, you can add bonds or futures to your portfolio.